Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ

As of April 25, 2011, the registrant had 87,756,047 shares of common stock outstanding.

In the opinion of management of Emulex Corporation (Emulex or the Company), the accompanying
unaudited condensed consolidated financial statements contain all adjustments (which are normal
recurring accruals) necessary to present fairly the Companys consolidated financial position,
results of operations, and cash flows. Interim results for the three and nine months ended March
27, 2011, are not necessarily indicative of the results that may be expected for the fiscal year
ending July 3, 2011. The accompanying condensed consolidated interim financial statements should be
read in conjunction with the Companys Annual Report on Form 10-K for the fiscal year ended June
27, 2010. The preparation of the condensed consolidated financial statements requires the use of
estimates and actual results could differ materially from managements estimates.

The Company has a 52 to 53 week fiscal year that ends on the Sunday nearest to June 30.
Accordingly, every fifth or sixth fiscal year will be a 53-week fiscal year. Fiscal year 2011 is a
53-week fiscal year.

Supplemental Cash Flow Information

Nine Months Ended

March 27,

March 28,

2011

2010

(in thousands)

Cash paid during the period for:

Interest

$

16

$

5

Income taxes

$

7,856

$

3,865

Non-cash activities:

Purchases of property and equipment not paid, net

$

1,335

$

792

Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update (ASU) 2010-06, Improving Disclosures about Fair Value Measurements, amending Accounting
Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, requiring additional
disclosures and clarifying existing disclosure requirements about fair value measurements. ASU
2010-06 requires entities to provide fair value disclosures by each class of assets and
liabilities, which may be a subset of assets and liabilities within a line item in the statement of
financial position. The additional requirements also include disclosure regarding the amounts and
reasons for significant transfers in and out of Level 1 and 2 of the fair value hierarchy and
separate presentation of purchases, sales, issuances and settlements of items within Level 3 of the
fair value hierarchy. The guidance clarifies existing disclosure requirements regarding the inputs
and valuation techniques used to measure fair value for measurements that fall in either Level 2 or
Level 3 of the hierarchy. ASU 2010-06 was effective for interim and annual reporting periods
beginning after December 15, 2009, or the third quarter of the Companys 2010 fiscal year, except
for the disclosures about purchases, sales, issuances and settlements which is effective for fiscal
years beginning after December 15, 2010, or the Companys 2012 fiscal year, and for interim periods
within those fiscal years. There was no impact of the Companys adoption of this guidance and
management is currently assessing the impact of the disclosure guidance effective in fiscal 2012.

In December 2010, the FASB issued ASU No. 2010-28, which was a consensus of the Emerging
Issues Task Force (EITF). Under ASC Topic 350 on goodwill and other intangible assets, testing for
goodwill impairment is a two-step test. When a goodwill impairment test is performed (either on an
annual or interim basis), an entity must assess whether the carrying amount of a reporting unit
exceeds its fair value (Step 1). If it does, an entity must perform an additional test to determine
whether goodwill has been impaired and to calculate the amount of that impairment (Step 2). The
EITF reached a final Consensus that the carrying amount of a reporting unit should be calculated as
the difference between the total assets and total liabilities assigned to the reporting unit;
however, it did not prescribe the use of a specific approach, such as the equity-value-based or
enterprise-value-based premise. The Task Force also concluded that the Step 2 test should be
performed in circumstances where a reporting unit has a

zero or negative carrying amount of equity
and there are qualitative factors that indicate it is more likely than not that a goodwill
impairment exists. These qualitative factors include those used to determine whether a triggering
event would require an interim goodwill impairment test. Entities with multiple reporting units may
continue to allocate assets and liabilities to individual reporting units consistent with current
practice. In addition, single
reporting unit entities would not be required to allocate all liabilities to the reporting
unit when the enterprise-value-based approach is used. The transition approach would require
companies to perform the Step 2 test on adoption for reporting units with a zero or negative
carrying amount for which qualitative factors exist on the adoption date that indicate that it is
more likely than not that a goodwill impairment exists. Any resulting impairment charge would be
recorded through a cumulative-effect adjustment to beginning retained earnings. The final Consensus
is effective for annual reporting periods beginning after December 15, 2010, which is the Companys
2012 fiscal year. Early adoption is prohibited. The Company does not expect any impact upon
adoption of this guidance as the Company has a single reporting unit, which does not have a zero or
negative carrying amount of equity.

In December 2010, the FASB issued ASU 2010-29, Business Combinations (Topic 805): Disclosure
of Supplementary Pro Forma Information for Business Combinations. This amendment affects any
public entity that enters into business combinations that are material on an individual or
aggregate basis. The comparative financial statements should present and disclose revenue and
earnings of the combined entity as though the business combination(s) that occurred during the
current year had occurred as of the beginning of the comparable prior annual reporting period only.
The amendments also expand the supplemental pro forma disclosures to include a description of the
nature and amount of material, nonrecurring pro forma adjustments directly attributable to the
business combination included in the reported pro forma revenue and earnings. The amendments are
effective prospectively for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December 15, 2010, or the
Companys 2012 fiscal year. The Company does not expect that there will be any financial impact of
adopting this guidance and will apply this guidance to future acquisitions.

2. Business Combinations

ServerEngines Corporation

On August 25, 2010, the Company acquired 100% of the outstanding common stock of ServerEngines
Corporation (ServerEngines), a privately-held, fabless semiconductor company located in Sunnyvale,
California. It is expected that the combination of Emulex and ServerEngines technology will create
a unique offering to deliver input/output (I/O) connectivity to our customers as part of their
converged networking solutions, including adapters, mezzanine cards and LAN on Motherboard (LOM)
solutions. These benefits and additional opportunities were among the factors that contributed to a
purchase price resulting in the recognition of preliminary estimated goodwill.

The Company has preliminarily allocated the purchase price of the acquired company to the net
tangible assets and intangible assets acquired based upon their estimated fair values.
Acquisition-related transaction costs and acquisition-related restructuring charges are not
included as components of consideration transferred but have been accounted for as expenses in the
period in which the costs are incurred. Total merger-related transaction costs incurred by the
Company were approximately $3.1 million, of which $2.0 million was incurred and recorded in general
and administrative expenses in the year ended June 27, 2010, and $1.1 million was incurred and
recorded in general and administrative expenses during the nine months ended March 27, 2011.

The aggregate preliminary purchase price was approximately $135.7 million and was comprised of
the following:

Included in the common stock issued and contingent consideration is approximately 2.2 million
shares of Emulex common stock to be held in escrow for up to 18 months from the acquisition date
subject to certain standard representations and warranties defined in the merger agreement.

The contingent consideration relates to 4.0 million shares that are issuable upon achievement
of two post-closing milestones. Approximately 2.5 million shares are tied to the employment of
certain recipients, and are therefore accounted for as stock-based compensation over the service
period. The Company has recognized approximately $10.6 million during the three months ended
September 26, 2010, $3.2 million during the three months ended December 26, 2010, and $1.4 million
during the three months ended March 27, 2011, and $15.2 million during the nine months ended March
27, 2011 and expects to recognize approximately another $6.9 million of stock based compensation
expense through fiscal 2012 related to the employment based contingent shares. The first
post-closing milestone was met during the quarter ended December 26, 2010.

The Company has preliminarily allocated the purchase price to the assets acquired and
liabilities assumed at estimated fair values. The excess of the purchase price over the aggregate
fair values is recorded as goodwill. This allocation is subject to revision as the estimates of
fair value of contingent consideration, inventory, identifiable intangible assets, in-process
research and development (IPR&D), and deferred taxes are based on preliminary information and the
final pre-acquisition tax returns are not yet complete. The Company is in the process of obtaining
third party valuations of certain assets. Thus, the allocation of the purchase price is subject to
refinement. The following table summarizes the preliminary allocation of the purchase price to the
estimated fair value of the assets acquired and liabilities assumed at the date of acquisition and
acquisition related charges:

(in thousands)

Current assets, including cash acquired of $1,725

$

12,162

Current deferred tax asset

4,248

Property and equipment

1,378

Other noncurrent assets

234

Intangible assets

135,310

Goodwill

85,662

Total assets acquired

238,994

Current liabilities

(72,073

)

Noncurrent deferred tax liability

(29,181

)

Accrued taxes

(2,486

)

Total liabilities assumed

(103,740

)

Acceleration of ServerEngines restricted stock included in stock based compensation expense

48

Settlement of pre-existing contractual agreement included in interest expense

353

Total acquisition related charges

401

Total preliminary estimated purchase price allocation

$

135,655

The current liabilities assumed of approximately $72.1 million included approximately $26.9
million due to the founders of ServerEngines and approximately $24.5 million due to Emulex. These
amounts were settled in conjunction with the acquisition. During the
nine months ended March 27, 2011, the Company recognized
approximately $0.4 million in interest expense for the amount by
which the loan due from ServerEngines was unfavorable from the
Company's perspective compared to the current market terms.

The intangible assets acquired of approximately $135.3 million were preliminary determined, in
accordance with the authoritative guidance for business combinations, based on the estimated fair
values using valuation techniques consistent with the market approach and income approach to
measure fair value. The remaining useful lives were estimated based on the underlying agreements or
the future economic benefit expected to be received from the assets. Of the approximately $135.3
million which was preliminarily assigned to acquired intangible assets, approximately $127.2
million was assigned to developed technology, approximately $2.4 million was assigned to in-process
research and development, approximately $1.7 million was assigned to a tradename, approximately
$1.6 million was assigned to backlog, approximately $1.9 million was assigned to customer
relationships, and approximately $0.5 million was assigned to covenants not to compete.

Intangible assets with identifiable lives are being amortized on a straight-line basis from
the acquisition date over their estimated useful lives as follows:

The goodwill recognized is not expected to be deductible for income tax purposes.

The acquisition has been included in the condensed consolidated statements of operations of
the Company since the date of acquisition. Since the acquisition date, the Company recorded
approximately $9.8 million in revenue with respect to the ServerEngines business in the Companys
condensed consolidated statements of operations.

Following is the summarized pro forma combined results of operations for the three and nine
months ended March 27, 2011 and March 28, 2010, assuming the acquisition had taken place at the
beginning of each fiscal year. The pro forma combined results of operations for the three months
ended March 27, 2011, was prepared based upon the statement of operations of Emulex for the three
months ended March 27, 2011, as all operating results of ServerEngines were included in the
statement of operations of Emulex since the acquisition date of August 25, 2010. The pro forma
combined results of operations for the three months ended March 28, 2010, was prepared based upon
the statement of operations of Emulex for the three months ended March 28, 2010, combined with the
statement of operations of ServerEngines for the period from January 1, 2010 to March 31, 2010. The
pro forma combined results of operations for the nine months ended March 27, 2011, was prepared
based upon the statement of operations of Emulex for the nine months ended March 27, 2011 combined
with the statement of operations of ServerEngines for period from July 1, 2010 to August 25, 2010
as all operating results of ServerEngines were included in the statement of operations of Emulex
since the acquisition date of August 25, 2010. The pro forma combined results of operations for the
nine months ended March 28, 2010, was prepared based upon the statement of operations of Emulex for
the nine months ended March 28, 2010 combined with the statement of operations of ServerEngines for
the period from July 1, 2009 to March 31, 2010.

The pro forma information includes adjustments to reflect the amortization and depreciation of
intangible and tangible assets acquired, incremental stock-based compensation expense resulting
from retention stock options granted to ServerEngines employees, reductions to interest expense for
the settlement of ServerEngines debt in connection with the acquisition, elimination of the
historical revenues and cost of goods sold between the Company and ServerEngines, and the related
estimated tax effects of these adjustments as well as an adjustment to shares outstanding for
shares issued for the acquisition. The pro forma results exclude transaction costs of approximately
$1.1 million for the nine months ended March 27, 2011 and stock based compensation related to the
contingent shares which is tied to the employment of certain recipients of approximately $1.4
million and $15.2 million recognized in the Companys statement of operations for the three and
nine months ended March 27, 2011, respectively, as these charges are not expected to have a
continuing impact on the statements of operations of the combined entity. The Company expects to
recognize additional stock based compensation charges of approximately $6.9 million through fiscal
2012 related to the stock based compensation charges for the contingent shares tied to the
employment of certain recipients.

The pro forma results are not necessarily indicative of the future results or results that
would have been reported had the acquisition taken place when assumed.

In May 2010, the Company purchased a business from a privately-held company in the storage
networking industry. Total consideration was approximately $13.0 million consisting of cash,
cancellation of loans receivable, and a partial return of the Companys equity investment in the
privately-held company. The transaction was accounted for as a business acquisition. The purchase
consideration was allocated to the tangible and intangible assets acquired, including IPR&D, based
on their estimated fair values. The Company recorded approximately $6.0 million of IPR&D, $0.9
million of fixed assets and approximately $6.1 million in goodwill as of June 27, 2010. During the
first quarter ended September 26, 2010, the Company obtained further information on the valuation
of the acquired fixed assets and in accordance with the authoritative guidance for business
combinations, retroactively recorded a purchase price adjustment to write down the fixed assets and
adjust goodwill of approximately $0.9 million as of June 27, 2010. During the three months ended
December 26, 2010, the Company received $1.0 million from escrow for standard representations and
warranties not met and adjusted preliminary consideration and goodwill retrospectively as of June
27, 2010. The purchase price allocation was final as of December 26, 2010. Pro forma results of
operations have not been presented as the acquisition was not material to the Companys
consolidated financial statements. During the three months ended March 27, 2011, the business
climate for the product associated with this IPR&D deteriorated
significantly as the technology was no longer expected to be designed
into customer products and was determined to be
other than temporary and thus, the entire amount of the IPR&D of approximately $6.0 million was
impaired during the three months ended March 27, 2011. See Note 6.

3. Fair Value of Financial Instruments

Fair value is defined as the exchange price that would be received for an asset or paid to
transfer a liability (an exit price) in the principal or most advantageous market for the asset or
liability in an orderly transaction between market participants on the measurement date. Valuation
techniques used to measure fair value must maximize the use of observable inputs and minimize the
use of unobservable inputs. The fair value hierarchy is based on three levels of inputs, of which
the first two are considered observable and the last unobservable, that may be used to measure fair
value. A description of the three levels of inputs is as follows:

Level 1 

Quoted prices in active markets for identical assets or liabilities;

Level 2 

Observable inputs other than Level 1 prices, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other inputs that
are observable or can be corroborated by observable market data for substantially the full
term of the assets or liabilities; and

Level 3 

Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.

Financial instruments measured at fair value on a recurring basis as of March 27, 2011 and
June 27, 2010 are as follows:

During the three months ended March 27, 2011, an impairment charge of approximately $9.2
million was recorded to write down the carrying value of the Companys equity investment in a
privately held company, which was recorded in other assets (see Note 7), to its estimated fair
value. The business climate of the privately-held company
deteriorated significantly as the technology was no longer expected
to be designed into customer products and was determined
to be other than temporary and thus, the fair value of the privately-held company was deemed to be
zero. The fair value was estimated based on the income approach, using Level 3 inputs requiring
the use of inputs that are both unobservable and significant to the fair value measurements. The
impairment charge was recorded in nonoperating (expense) income, net in the accompanying
consolidated statements of operations.

The Companys other financial instruments consist primarily of a note receivable of
approximately $1.0 million. The fair value of the Companys note receivable is based on management
judgment using market-based interest rates and is believed to approximate fair value.
Subsequent to the quarter ended March 27, 2011, the loan was settled.

4. Investments

The Companys portfolio of held-to-maturity investments consists of the following:

Gross

Gross

Unrealized

Unrealized

Cost

Gains

Losses

Fair Value

(in thousands)

March 27, 2011

Term deposits

$

2,740

$



$



$

2,740

U.S. Government securities

2,251





2,251

U.S. Government sponsored entity securities

1,366



(1

)

1,365

Corporate bonds

1,605

1



1,606

$

7,962

$

1

$

(1

)

$

7,962

June 27, 2010

Municipal bonds

$

101

$



$



$

101

Term deposits

3,238



(1

)

3,237

U.S. Government securities

23,006

2



23,008

U.S. Government sponsored entity securities

19,645

3



19,648

$

45,990

$

5

$

(1

)

$

45,994

Investments at March 27, 2011 and June 27, 2010 were classified as short-term investments due
to the investments having maturity dates of less than one year.

The activity in goodwill during the nine months ended March 27, 2011 is as follows:

Carrying

Amount

(in thousands)

Goodwill, as of June 27, 2010 (a)

$

93,835

Goodwill from ServerEngines acquisition during the period

85,662

Goodwill, as of March 27, 2011

$

179,497

(a)

Purchase price allocation adjustments, net, of approximately $0.1 million during the
measurement period were recorded retrospectively to June 27, 2010 pursuant to the
authoritative guidance for business combinations.

Intangible assets, net, are as follows:

March 27,

June 27,

2011

2010

(in thousands)

Intangible assets subject to amortization:

Core technology and patents

$

77,345

$

73,345

Accumulated amortization, core technology and patents

(59,792

)

(53,050

)

Developed technology

195,700

68,500

Accumulated amortization, developed technology

(73,583

)

(51,375

)

Customer relationships

5,100

3,200

Accumulated amortization, customer relationships

(3,436

)

(2,398

)

Tradename

6,339

4,639

Accumulated amortization, tradename

(4,739

)

(4,364

)

Covenants not to compete

550



Accumulated amortization, covenants not to compete

(129

)



Backlog

1,560



Accumulated amortization, backlog

(1,098

)



Perpetual licenses

157



Accumulated amortization, perpetual licenses

(18

)



Total amortizable intangible assets, net

143,956

38,497

In process research and development

2,400

6,000

Total intangible assets, net

$

146,356

$

44,497

During the three months ended March 27, 2011, the business climate for the product associated
with the IPR&D from the acquisition of a privately-held company in fiscal 2010, deteriorated
significantly as the technology was no longer expected
to be designed into customer products and was determined to be other than temporary and thus, the entire amount of the IPR&D of
approximately $6.0 million was impaired during the three months ended March 27, 2011.

The intangible assets subject to amortization are being amortized on a straight-line basis
over original lives ranging from approximately 10 months to 10 years. Aggregate amortization
expense for intangible assets for the three months ended March 27, 2011 and March 28, 2010, was
approximately $10.7 million and $6.4 million, respectively. Aggregated amortization expense for
intangible assets for the nine months ended March 27, 2011 and March 28, 2010, was approximately
$31.6 million and $19.3 million, respectively.

Amortization expense of approximately $8.5 million and $4.7 million related to core and
developed technology is included in cost of sales in the accompanying condensed consolidated
statements of operations for the three months ended March 27, 2011 and March 28, 2010,
respectively. Amortization expense of approximately $24.6 million and $14.2 million related to core
and developed technology is included in cost of sales in the accompanying condensed consolidated
statements of operations for the nine months ended March 27, 2011 and March 28, 2010, respectively.

The following table presents the estimated future aggregated amortization expense of
intangible assets, excluding in process research and development, as of March 27, 2011 (in
thousands):

2011 (remaining 3 months)

$

10,736

2012

30,337

2013

25,888

2014

25,583

2015

21,584

Thereafter

29,828

$

143,956

7. Other Assets

Components of other assets are as follows:

March 27,

June 27,

2011

2010

(in thousands)

Note receivable

$

1,000

$

24,256

Equity investment in privately-held company



9,184

Other

3,910

8,987

$

4,910

$

42,427

In November 2010, the Company loaned $1.0 million to a privately-held company. The note
receivable bears simple interest at 8.0% per annum with the maturity date being the earlier of June
30, 2011 or certain defined events such as consummation of financing, change in control, or
default. The note receivable is collateralized by substantially all of the assets of the
privately-held company. Subsequent to the quarter ended March 27, 2011, the loan was settled.

As described in Note 2, notes receivable from ServerEngines were settled in connection with
the acquisition on August 25, 2010.

The Companys equity investment in a privately-held company is accounted for under the cost
method. Under the cost method, investments are carried at cost and are adjusted for
other-than-temporary declines in fair value, distributions of earnings, or additional investments.
The Company monitors its investment for impairment on a quarterly basis and makes appropriate
reductions in carrying values when such impairments are determined to be other-than-temporary.
Impairment charges are included in other (expense) income, net in the consolidated statements of
operations. Factors used in determining an impairment include, but are not limited to, the current
business environment including competition; uncertainty of financial condition; technology and
product prospects; results of operations; and current financial position including any going
concern considerations such as the rate at which the investee utilizes cash and the investees
ability to obtain additional financing. During the three months ended March 27, 2011, the business
climate of the privately-held company deteriorated significantly as the technology was no longer expected
to be designed into customer products and was determined to be other than
temporary and thus, the fair value of the privately-held company was deemed to be zero. As a
result, the entire investment of approximately $9.2 million in the privately-held company was
impaired during the three months ended March 27, 2011.

8. Accrued Liabilities

Components of accrued liabilities are as follows:

March 27,

June 27,

2011

2010

(in thousands)

Payroll and related costs

$

20,439

$

14,387

Warranty liability

1,956

1,637

Deferred revenue and accrued rebates

10,417

4,169

Other

8,466

8,860

$

41,278

$

29,053

The Company provides a warranty of between one to five years on its products. The Company
records a provision for estimated warranty related costs at the time of sale based on historical
product return rates and the

On September 14, 2009, Broadcom Corporation filed a patent infringement lawsuit against the
Company in the United States District Court in the Central District of California. The original
complaint alleged that the Company is infringing 10 Broadcom patents covering certain data and
storage networking technologies. On February 23, 2010, Broadcom filed a first amended complaint.
The first amended complaint alleges that the Company is infringing 12 Broadcom patents covering
certain data and storage networking technologies. The complaint seeks declaratory and injunctive
relief, monetary damages, and interest and costs, including attorneys and expert fees. On March
25, 2010, the Company filed its answer and affirmative defenses to the first amended complaint
alleging that it believes that the Broadcom patents at issue are invalid or not infringed, or both.
In addition, the Company has asserted counterclaims for declaratory judgment of invalidity and
non-infringement against each of the Broadcom patents at issue, and seeks award of attorneys fees,
costs, and expenses. On January 11, 2010, the Court set a trial date of September 20, 2011. On
February 12, 2010, Broadcom sought permission to amend its complaint to assert an additional
patent, making the total patents asserted as 11 instead of 10. On March 25, 2010, Emulex filed an
answer to the amended Broadcom complaint. On April 2, 2010, Broadcom filed a disclosure of
infringement contentions.

On May 26, 2010, Broadcom Corporation filed a separate patent infringement lawsuit against the
Company in the United States District Court in the Central District of California. The 2010 lawsuit
asserts that certain Emulex products are infringing on a Broadcom patent covering certain data and
storage networking technologies. Broadcom seeks a judgment for damages, injunctive relief, and an
award of attorneys fees and costs. On June 30, 2010, the Judge stated that the 2009 and 2010
patent cases would be consolidated into a single lawsuit. On October 14, 2010, the Court issued an
order on the parties joint stipulation dismissing three patents from the case. On November 1,
2010, the Court issued an order allowing Broadcom to make infringement assertions against
additional Emulex products. In a Court ruling dated December 17, 2010, there are interpretations of
certain terms contained in the claims of the patents being asserted by Broadcom. On February 22,
2011, the Court issued an order on the parties joint stipulation dismissing one patent from the
case (leaving 8 patents in the case). The status of this matter does not allow management of the
Company to determine whether a loss will occur or estimate the range of such a loss. Accordingly,
management has determined that a potential loss is not probable and no amount has been accrued.

On November 9, 2009, the Company filed a lawsuit against Broadcom Corporation alleging that
Broadcom has acted in an anticompetitive manner in violation of federal antitrust laws, as well as
made defamatory statements and engaged in acts of unfair competition. The complaint seeks actual
and punitive damages, attorneys fees and costs, and injunctive relief against Broadcom. On January
4, 2010, the Company filed an amended complaint. The amended complaint alleges that Broadcom has
acted in an anticompetitive manner in violation of federal antitrust laws and made defamatory
statements. The amended complaint seeks actual and punitive damages, attorneys fees and costs, and
injunctive relief. On June 7, 2010, the Court denied Broadcoms motion to dismiss Emulexs first
amended complaint and to strike Emulexs defamation claim.

On November 15, 2001, prior to the Companys acquisition of Vixel Corporation, a securities
class action was filed in the United States District Court in the Southern District of New York as
Case No. 01 CIV. 10053 (SAS), Master File No. 21 MC92 (SAS) against Vixel and two of its officers
and directors (one of which is James M. McCluney, the Companys current Chief Executive Officer)
and certain underwriters who participated in the Vixel initial public offering in late 1999. The
amended complaint alleged violations under Section 10(b) of the Exchange Act and Section 11 of the
Securities Act and sought unspecified damages on behalf of persons who purchased Vixel stock during
the period October 1, 1999 through December 6, 2000. On April 2, 2009, the parties signed a
Stipulation and Agreement of Settlement (the 2009 Settlement) to the District Court for preliminary
approval. The District Court granted the plaintiffs motion for preliminary approval and
preliminarily certified the settlement classes on June 10, 2009. The settlement fairness hearing
was held on September 10, 2009. On October 6, 2009, the District Court entered an opinion granting
final approval to the settlement and directing that the Clerk of the District Court close these
actions. The 2009 Settlement provides for a settlement amount of $586 million, and Emulex has no
obligation to pay any part of that amount. Notices of appeal of the opinion granting final approval
were originally filed by six groups of appellants, four of whom have settled with plaintiffs.

In addition to the ongoing litigation discussed above, the Company is involved in various
claims and legal actions arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of the open matters will not have a material adverse effect on the
Companys consolidated financial position, results of operations or liquidity.

Other Commitments and Contingencies

The Company has approximately $35.4 million of liabilities for uncertain tax positions as of
March 27, 2011 for which a reasonably reliable estimate of the period of payment cannot be made.

The Company has entered into various agreements for professional services, joint-development,
non-recurring engineering, and purchases of inventory. As of March 27, 2011, the Companys
obligation associated with such agreements was approximately $62.7 million.

In addition, the Company provides limited indemnification in selected circumstances within its
various customer contracts whereby the Company indemnifies the parties to whom it sells its
products with respect to the Companys product infringement of certain intellectual property, and
in some limited cases against bodily injury or damage to real or tangible personal property caused
by a defective Company product. It is not possible to predict the maximum potential amount of
future payments under these or similar agreements, due to the conditional nature of the Companys
obligations and the unique facts and circumstances involved in each particular agreement. As of
March 27, 2011, the Company has not incurred any significant costs related to indemnification of
its customers.

10. Treasury Stock

In early August 2008, the Companys Board of Directors authorized a plan to repurchase up to
$100.0 million of its outstanding common stock. In April 2009, upon receipt of an unsolicited
acquisition proposal and related tender offer of Broadcom Corporation to acquire the Company, the
Companys Board of Directors elected to temporarily suspend any activity under the share repurchase
plan. In light of Broadcom allowing its tender offer to expire on July 14, 2009, Emulexs Board of
Directors elected to reactivate the $100.0 million share repurchase plan effective July 15, 2009.
As of March 27, 2011, the Company has repurchased approximately 6.1 million shares of its common
stock for an aggregate purchase price of approximately $58.3 million or an average of $9.55 per
share under this plan, of which approximately 4.1 million shares for an aggregate purchase price of
approximately $40.1 million or an average of $9.76 was purchased during the nine months ended March
27, 2011. Approximately $41.7 million is available under this program after these repurchases. The
Company may repurchase shares from time-to-time in open market purchases or privately negotiated
transactions. It is expected that any future share repurchases will be financed by available cash
balances and cash from operations. The Companys Board of Directors has not set an expiration date
for the plan.

11. Stock-Based Compensation

As of March 27, 2011, the Company had three stock-based plans for employees and directors that
are open for future awards, the 2005 Equity Incentive Plan (Equity Incentive Plan), the 1997 Stock
Award Plan for Non-Employee Directors (Director Plan), and the Emulex Corporation Employee Stock
Purchase Plan (Purchase Plan). In addition, the Company had nine stock-based plans (All Other
Plans), including seven plans assumed in connection with acquisitions, each of which is closed for
future grants but has options outstanding. Available for future awards are 4,338,445 shares under
the Equity Incentive Plan, 480,905 shares under the Director Plan, and 1,873,399 shares under the
Purchase Plan.

In connection with the acquisition of ServerEngines on August 25, 2010, the Company
assumed the ServerEngines Corporation Amended and Restated 2008 Stock Option Plan (the
ServerEngines Plan). The ServerEngines options were replaced with Emulex options based on the
acquisition exchange ratio and continue to be subject to the terms of the ServerEngines Plan. The
options have lives of up to 10 years and generally vest over a 4 or 5 year period. The
ServerEngines Plan is closed for future grants. There were 472,732 options issued in exchange for
the options assumed.

Aggregate amounts recognized in the condensed consolidated financial statements with respect
to these plans are as follows:

Three Months

Three Months

Nine Months

Nine Months

Ended

Ended

Ended

Ended

March 27,

March 28,

March 27,

March 28,

2011

2010

2011

2010

(in thousands)

Total cost of stock-based payment plans
during the period

$

7,427

$

4,686

$

31,365

$

13,179

Amounts capitalized in inventory during the period

(165

)

(123

)

(545

)

(326

)

Amounts recognized in income for amounts
previously capitalized in inventory

173

83

571

357

Amounts charged against income, before income tax
benefit

$

7,435

$

4,646

$

31,391

$

13,210

Amount of related income tax benefit recognized
in income

$

2,291

$

1,640

$

6,624

$

4,707

In connection with the ServerEngines acquisition, the Company has recognized approximately
$15.2 million of stock-based compensation expense related to employment based contingent shares
during the nine months ended March 27, 2011 and expects to recognize approximately another $6.9
million of stock-based compensation expense through fiscal 2012.

The fair value of stock options granted and the compensatory element to the shares to be
purchased under the Purchase Plan is estimated on the date of grant using the Black-Scholes-Merton
option-pricing model based on the market price of the underlying common stock on the date of grant,
expected term, stock price volatility and expected risk-free interest rates. Expected volatilities
are based on equal weighting of historical volatilities for periods equal to the expected term and
implied volatilities based on traded options to buy the Companys shares. The fair value of each
unvested stock award is determined based on the closing price of the Companys common stock on the
grant date.

The assumptions used to compute the fair value of stock option grants for the three and nine months
ended March 27, 2011 and March 28, 2010 are:

Three Months Ended

Nine Months Ended

March 27,

March 28,

March 27,

March 28,

2011

2010

2011

2010

Expected volatility

N/A

43%  45%

39%  45%

43%  49%

Weighted average expected volatility

N/A

44%

43%

47%

Expected dividends

N/A







Expected term (in years)

N/A

2.97  4.97

3.34  5.34

2.97  4.97

Weighted average expected term (in
years)

N/A

3.81

4.16

3.81

Risk-free rate

N/A

1.62%  2.55%

0.69%  1.80%

1.49%  2.55%

No options were granted for the three month period ended March 27, 2011.

The assumptions used to compute the fair value of the compensatory element related to the
shares to be purchased under the Purchase Plan for the three and nine months ended March 27, 2011
and March 28, 2010 were:

Three Months Ended

Nine Months Ended

March 27,

March 28,

March 27,

March 28,

2011

2010

2011

2010

Expected volatility

37

%

43

%

37

%

43

%

Expected dividends









Expected term (in years)

0.49

0.49

0.49

0.49

Risk-free rate

0.18

%

0.17

%

0.18

%

0.17

%

A summary of option activity under the plans for the nine months ended March 27, 2011 is as
follows:

Weighted

Average

Weighted

Remaining

Aggregate

Average

Contractual

Intrinsic

Options

Exercise Price

Term

Value

(in years)

(in millions)

Options outstanding at June 27, 2010

7,531,095

$

20.73

2.72

$

0.9

Options granted

1,103,500

$

9.61

Options granted to replace ServerEngines
options assumed as part of the acquisition

472,732

$

5.18

Options exercised

(236,762

)

$

6.79

Options canceled

(1,264,859

)

$

34.77

Options forfeited

(80,654

)

$

10.84

Options outstanding at March 27, 2011

7,525,052

$

16.31

3.08

$

4.0

Options vested and expected to vest at
March 27, 2011

7,255,254

$

16.56

2.98

$

3.7

Options exercisable at March 27, 2011

5,932,725

$

18.14

2.42

$

2.2

A summary of unvested stock awards activity for the nine months ended March 27, 2011 is as
follows:

Weighted

Average Grant

Number of

Date Fair

Awards

Value

Awards outstanding and unvested at June 27, 2010

3,437,741

$

10.46

Awards granted

1,904,745

$

10.80

Awards vested

(1,361,206

)

$

11.48

Awards forfeited

(221,417

)

$

9.83

Awards outstanding and unvested at March 27, 2011

3,759,863

$

10.30

As of March 27, 2011, there was approximately $30.6 million of total unrecognized compensation
cost related to nonvested share-based compensation arrangements granted under the plans, including
$6.9 million related to employment based contingent shares granted in connection with the
ServerEngines acquisition. That cost is expected to be recognized over a weighted-average period of
approximately 1.3 years.

The weighted average grant date fair value of options granted during the nine months ended
March 27, 2011 and March 28, 2010 was approximately $3.40 per share and $3.94 per share,
respectively. The weighted average grant date fair value of unvested stock awards granted during
the nine months ended March 27, 2011 and March 28, 2010 was approximately $10.80 per share and
$9.75 per share, respectively. The total intrinsic value of stock options exercised was
approximately $1.1 million and $0.7 million for the nine months ended March 27, 2011 and March 28,
2010, respectively. The total fair value of unvested stock awards that vested during the nine
months ended March 27, 2011 and March 28, 2010 was approximately $14.5 million and $11.4 million,
respectively. Cash received from stock option exercises under stock-based plans and shares
purchased under the Purchase Plan was approximately $4.6 million and $3.2 million for the nine
months ended March 27, 2011 and March 28, 2010, respectively. The actual tax benefit realized for
tax deductions from option exercises was approximately $5.8 million and $4.6 million for the nine
months ended March 27, 2011 and March 28, 2010, respectively.

At Emulexs Annual Shareholders Meeting on November 23, 2010, the shareholders approved an
increase in the number of shares authorized by 1.5 million and 2.0 million shares under the
Purchase Plan and the Equity Incentive Plan, respectively. As of March 27, 2011, including the
shares newly authorized, the Company anticipates that the number of shares authorized under the
Equity Incentive Plan, the Director Plan, the Purchase Plan, and All Other Plans are sufficient to
cover future stock option exercises, including the shares that will be purchased during the next
six month option period from November 1, 2010 to April 30, 2011 under the Purchase Plan.

12. Income Taxes

The Companys effective income tax rate depends on various factors, such as tax legislation,
the mix of domestic and international pre-tax income, and research and development credits as a
percentage of aggregate pre-tax income, and the effectiveness of the Companys tax planning
strategies. The Company and its domestic subsidiaries file federal, state and local income /
franchise tax returns in the U.S. The Companys international subsidiaries file income tax returns
in various non-U.S. jurisdictions. The Company recorded an income tax provision of approximately
$17.8 million in the nine months ended March 27, 2011 compared to an income tax benefit of
approximately $20.8 million in the nine months ended March 28, 2010. The effective tax rate was
approximately 36% for the nine months ended March 27, 2011 compared to an effective tax benefit
rate of 397% for the nine months ended March 28, 2010. During the nine months ended March 27, 2011,
one of Emulexs domestic entities entered into a platform contribution transaction with an
international subsidiary to license the recently acquired ServerEngines technology, resulting in
U.S. income taxes of approximately $36.9 million. Such tax expense was partially offset by the
Federal research credit being extended retroactively to calendar 2010 as part of the Tax Relief,
Unemployment Insurance Reauthorization and Job Creation Act of 2010 in December 2010, resulting in
an income tax benefit of approximately $6.2 million. Fiscal years 2008 and 2009 are under audit by
the Internal Revenue Service (IRS). The Company is currently responding to Information Document
Requests that have been received. No adjustments are proposed at this time. The Company does not
expect that the results of the audit will have a material adverse effect on its financial condition
or results of operations.

13. Net (Loss) Income Per Share

The following table sets forth the computation of basic and diluted net (loss) income per
share:

Three Months Ended

Nine Months Ended

March 27,

March 28,

March 27,

March 28,

2011

2010

2011

2010

(in thousands, except per

(in thousands, except per

share data)

share data)

Numerator  Net (loss) income

$

(18,641

)

$

13,309

$

(67,589

)

$

26,089

Less: Undistributed earnings allocated to participating
securities



(143

)



(378

)

Undistributed earnings allocated to common shareholders
for basic net (loss) income per share

$

(18,641

)

$

13,166

$

(67,589

)

$

25,711

Undistributed earnings allocated to common shareholders
for diluted net (loss) income per share

$

(18,641

)

$

13,169

$

(67,589

)

$

25,717

Denominator:

Denominator for basic net (loss)
income per share  weighted
average shares outstanding

The antidilutive stock options and unvested stock were excluded from the computation of
diluted net (loss) income per share due to the assumed proceeds from the awards exercise or
vesting being greater than the average market price of the common shares or due to the Company
incurring a net loss for the periods presented.

14. Comprehensive (Loss) Income

Components of comprehensive (loss) income are as follows:

Three Months Ended

Nine Months Ended

March 27,

March 28,

March 27,

March 28,

2011

2010

2011

2010

(in thousands)

(in thousands)

Net (loss) income

$

(18,641

)

$

13,309

$

(67,589

)

$

26,089

Other comprehensive (loss) income 

Foreign currency translation adjustments,
net of income taxes

196

(110

)

327

(135

)

$

(18,445

)

$

13,199

$

(67,262

)

$

25,954

Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations

Forward-Looking Statements

Certain statements contained in this Form 10-Q may constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. We may also make
forward-looking statements in other reports filed with the Securities and Exchange Commission, in
materials delivered to stockholders and in press releases. In addition, our representatives may
from time to time make oral forward-looking statements. Forward-looking statements provide current
expectations of future events based on certain assumptions and include any statement that does not
directly relate to any historical or current fact. Words such as anticipates, in the opinion,
believes, intends, expects, may, will, should, could, plans, forecasts,
estimates, predicts, projects, potential, continue, and similar expressions may be
intended to identify forward-looking statements.

Actual future results could differ materially from those described in the forward-looking
statements as a result of a variety of factors, including those discussed in Managements
Discussion and Analysis of Financial Condition and Results of Operations set forth below, and, in
particular, those in the section entitled Risk Factors in Part II, Item 1A of this Form 10-Q
included elsewhere herein. We expressly disclaim any obligation or undertaking to release publicly
any updates or changes to these forward-looking statements that may be made to reflect any future
events or circumstances. We wish to caution readers that a number of important factors could cause
actual results to differ materially from those in the forward-looking statements. These factors
include the ability to realize the anticipated benefits of the acquisition of ServerEngines
Corporation (ServerEngines) on a timely basis or at all, and the Companys ability to integrate the
technology, operations and personnel of ServerEngines into its existing operations in a timely and
efficient manner. In addition, we have and will incur charges associated with the acquisition of
ServerEngines. As the valuation and purchase price allocation have not been finalized, we are
unable to predict the impact of various post-acquisition charges, including amortization of
intangibles and stock-based compensation. The fact that the economy generally, and the technology
and storage segments specifically, have been in a state of uncertainty makes it difficult to
determine if past experience is a good guide to the future and makes it impossible to determine if
markets will grow or shrink in the short term. The current economic downturn and the resulting
economic uncertainty for our customers and the storage networking market as a whole has and could
continue to adversely affect our revenues and results of operations. Furthermore, the effect of any
actual or potential unsolicited offers to acquire us may have an adverse effect on our operations.
As a result of this uncertainty, we are unable to predict our future results with any accuracy.
Other factors affecting these forward-looking statements include but are not limited to the
following: faster than anticipated decline in the storage networking market, slower than expected
growth of the converged networking market or the failure of our Original Equipment Manufacturer
(OEM) customers to successfully incorporate our products into their systems; our dependence on a
limited number of customers and the effects of the loss of, or decrease or delays in orders by, any
such customers, or the failure of such customers to make timely payments; the emergence of new or
stronger competitors as a result of consolidation

movements in the market; the timing and market acceptance of our or our OEM customers new or
enhanced products; costs associated with expansion into new areas of the storage technology market;
the variability in the level of our backlog and the variable and seasonal procurement patterns of
our customers; impairment charges, including but not limited to goodwill, intangible assets, and
equity investments recorded under the cost method; changes in tax rates or legislation; the effects
of acquisitions; any inadequacy of our intellectual property protection or the potential that
third-party claims of infringement and any related indemnity obligations or adverse judgments; the
effects of terrorist activities, natural disasters, such as the earthquake and resulting tsunami
off the coast of Japan in March 2011, and any resulting disruption in our supply chain or customer
purchasing patterns or any other resulting economic or political instability; the highly
competitive nature of the markets for our products as well as pricing pressures that may result
from such competitive conditions; the effects of changes in our business model to separately charge
for software; the effect of rapid migration of customers towards newer, lower cost product
platforms; possible transitions from board or box level to application specific integrated circuit
(ASIC) solutions for selected applications; a shift in unit product mix from higher-end to
lower-end or mezzanine card products; a faster than anticipated decrease in the average unit
selling prices or an increase in the manufactured cost of our products; delays in product
development; our reliance on third-party suppliers and subcontractors for components and assembly;
our ability to attract and retain key technical personnel; our ability to benefit from our research
and development activities; our dependence on international sales and internationally produced
products; the effects of acquisitions, including the recent acquisition of ServerEngines
Corporation (ServerEngines); changes in accounting standards; and the potential effects of global
warming and any resulting regulatory changes on our business. These and other factors could cause
actual results to differ materially from those in the forward-looking statements and are discussed
elsewhere in this Form 10-Q, in our other filings with the Securities and Exchange Commission or in
materials incorporated therein by reference.

Executive Overview

Emulex creates enterprise-class products that connect storage, servers and networks. We are a
leading supplier of a broad range of advanced storage networking convergence solutions. The worlds
leading server and storage providers depend on our products to help build high performance, highly
reliable, and scalable storage and converged networking solutions. Our products and technologies
leverage flexible multi protocol architectures that extend from deep within the storage array to
the server edge of storage area networks (SANs and 10Gb converged networks).

Our Company operates within a single business segment that has two market focused product
lines  Host Server Products (HSP) and Embedded Storage Products (ESP). HSP connect servers and
storage to networks using industry standard protocols including Internet Protocol (IP) and Fibre
Channel, Transmission Control Protocol (TCP)/IP, Internet Small Computer System Interface (iSCSI),
Network Attached Storage (NAS) and Fibre Channel over Ethernet (FCoE). Our Ethernet based products
include OneConnect Universal Converged Network Adapters (UCNAs) that enable network convergence.
Our Fibre Channel based products include LightPulse® HBAs, custom form factor solutions for OEM
blade servers and ASICs. These products enable servers to efficiently connect to local area
networks (LANs), SANs, and NAS by offloading data communication processing tasks from the server as
information is delivered and sent to the network.

Our corporate headquarters are located at 3333 Susan Street, Costa Mesa, California 92626. Our
periodic and current reports filed with, or furnished to, the Securities and Exchange Commission
pursuant to the requirements of the Securities and Exchange Act of 1934 are available free of
charge through our website (www.emulex.com) as soon as reasonably practicable after such reports
are electronically filed with, or furnished to, the Securities and Exchange Commission. References
contained herein to Emulex, the Company, the Registrant, we, our, and us refer to
Emulex Corporation and its subsidiaries.

Global Initiatives

As part of our global initiatives, we created an Irish subsidiary to expand our international
operations by providing local customer service and support to our customers outside of the United
States in the fourth quarter of fiscal 2008. In addition, Emulex granted an intellectual property
license and entered into a research and development cost sharing agreement with its subsidiary in
the Isle of Man. The terms of the license require that the subsidiary make prepayments of expected
royalties to a U.S. subsidiary, the first of which was paid before the end of fiscal 2008 in the
amount of approximately $131.0 million for expected royalties relating to fiscal 2009 through 2015.
In the fourth quarter of fiscal 2010, the subsidiary made the second prepayment of approximately
$6.5 million for expected royalties relating to fiscal 2011 through 2015. These global initiatives
are expected to continue to reduce our effective tax rate. During the second quarter of fiscal 2011
one of our domestic entities entered into a platform contribution transaction with one of our
international subsidiaries to license the recently acquired ServerEngines technology for
approximately $111.5 million. While these global initiatives are expected to continue to reduce our
effective tax rate beginning with fiscal year 2012, the platform contribution transaction resulted
in an incremental tax expense of approximately $39.3 million. Our cash balances and investments are
held in numerous locations throughout the world. The cash and investments held outside of the U.S.
are expected to increase primarily in our Isle of Man and Ireland subsidiaries. Substantially all
of the amounts held outside of the U.S. will be available for repatriation at any time, but under
current law, repatriated funds would be subject to U.S. federal income taxes, less applicable
foreign tax credits.

Business Combination

On August 25, 2010, we acquired 100% of the outstanding common shares of ServerEngines
Corporation (ServerEngines), a privately-held, fabless semiconductor company located in Sunnyvale,
California. The combination of Emulex and ServerEngines technology creates a unique offering to
deliver I/O connectivity for converged networking solutions, including adapters, mezzanine cards
and LAN on Motherboard (LOM) solutions. In addition, the acquisition will add the ServerEngines
PilotTM family of Server Management Controllers, which reside on the motherboard,
enabling remote IP based lights out management capabilities.

The following discussion and analysis should be read in conjunction with the condensed
consolidated financial statements included elsewhere herein.

Percentage of Net Revenues

Percentage of Net Revenues

Three Months Ended

Nine Months Ended

March 27,

March 28,

March 27,

March 28,

2011

2010

2011

2010

Net revenues

100

%

100

%

100

%

100

%

Cost of sales

45

37

45

38

Gross profit

55

63

55

62

Operating expenses:

Engineering and development

38

31

37

32

Selling and marketing

14

13

13

14

General and administrative

11

12

13

12

Amortization of other intangible
assets

2

2

2

2

In process
research and development impairment

5



2



Total operating expenses

70

58

67

60

Operating (loss) income

(15

)

5

(12

)

2

Nonoperating (expense) income, net:

Interest income









Interest expense









Impairment
of strategic investment

(8

)



(3

)



Other expense, net









Total nonoperating (expense)
income, net

(8

)



(3

)



(Loss) income before income taxes

(23

)

5

(15

)

2

Income tax (benefit) provision

(7

)

(8

)

5

(7

)

Net (loss) income

(16

)%

13

%

(20

)%

9

%

Three months ended March 27, 2011, compared to three months ended March 28, 2010

Net Revenues. Net revenues for the third quarter of fiscal 2011 ended March 27, 2011,
increased by approximately $9.9 million, or 10%, to approximately $112.1 million, compared to
approximately $102.2 million for the same quarter of fiscal 2010 ended March 28, 2010.

Net Revenues by Product Line

Net revenues by product line were as follows:

Net Revenues by Product Line

Three Months

Three Months

Ended

Percentage

Ended

Percentage

March 27,

of Net

March 28,

of Net

Increase/

Percentage

(in thousands)

2011

Revenues

2010

Revenues

(Decrease)

Change

Host Server Products

$

84,825

76

%

$

69,724

68

%

$

15,101

22

%

Embedded Storage Products

27,201

24

%

32,348

32

%

(5,147

)

(16

)%

Other

56



132



(76

)

(58

)%

Total net revenues

$

112,082

100

%

$

102,204

100

%

$

9,878

10

%

HSP primarily consists of HBAs, mezzanine cards, input/output (I/O) ASICs, and UCNAs. For the
three months ended March 27, 2011, our Fibre Channel based products accounted for most of our HSP
revenues. The increase in our HSP net revenue for the three months ended March 27, 2011 compared to
the three months ended March 28, 2010 was mainly due to an increase in units shipped of
approximately 248% partially offset by a decrease in average

selling price of approximately 65%. The significant increase in units shipped and decrease in
average selling price was primarily due to the inclusion of sales resulting from the acquisition of
ServerEngines on August 25, 2010, which accounted for no revenues in the same quarter in the prior
year and had a significantly lower average selling price compared to other Emulex products along
with the growth in Fibre Channel products.

ESP primarily consists of our InSpeed®, FibreSpy®, I/O controller solutions, and bridge and
router products. The decrease in our ESP net revenue for the three months ended March 27, 2011
compared to the three months ended March 28, 2010 was primarily due to a decrease in units shipped
of approximately 23% partially offset by an increase in average selling price of approximately 9%.
The decrease in units shipped was primarily due to the tail off in legacy products partially offset
by the ramping volumes from our bridging and target design wins.

Our Other category primarily consists of legacy and other products.

Net Revenues by Major Customers

In addition to direct sales, some of our larger OEM customers purchase or market products
indirectly through distributors, resellers or other third parties. If these indirect sales are
purchases of customer-specific models, we are able to track these sales. However, if these indirect
sales are purchases of our standard models, we are not able to distinguish them by OEM customer.
Customers whose direct net revenues, or total direct and indirect net revenues (including
customer-specific models purchased or marketed indirectly through distributors, resellers and other
third parties), exceeded 10% of our net revenues were as follows:

Net Revenues by Major Customers

Direct Revenues

Total Direct and Indirect Revenues (2)

Three Months

Three Months

Three Months

Three Months

Ended

Ended

Ended

Ended

March 27,

March 28,

March 27,

March 28,

2011

2010

2011

2010

Net revenue percentage (1):

OEM:

EMC







14

%

Hewlett-Packard

20

%

13

%

22

%

13

%

IBM

22

%

20

%

30

%

28

%

(1)

Amounts less than 10% are not presented.

(2)

Customer-specific models purchased or marketed indirectly through distributors, resellers,
and other third parties are included with the OEMs revenues in these columns rather than as
revenue for the distributors, resellers or other third parties.

Direct
sales to our top five customers accounted for approximately 61% of total net revenues
for the three months ended March 27, 2011, compared to approximately 56% for the three months ended
March 28, 2010. Direct and indirect sales to our top five customers accounted for approximately 75%
of total net revenues for the three months ended March 27, 2011 compared to approximately 71% for
the three months ended March 28, 2010. Our net revenues from customers can be significantly
impacted by changes to our customers business and their business models.

The increase in OEM net revenues for the three months ended March 27, 2011 compared to the
three months ended March 28, 2010 was primarily due to an increase of approximately 29% in HSP
revenues generated through our OEMs. Distribution net revenues for the three months ended March 27,
2011 did not change significantly compared to the three months ended March 28, 2010. We believe
that our net revenues are being generated primarily as a result of product certifications and
qualifications with our OEM customers, which take products directly and indirectly through
distribution and contract manufacturers. We view product certifications and qualifications as an
important indicator of future revenue opportunities and growth for the Company. However, product
certifications and qualifications do not necessarily ensure continued market acceptance of our
products by our OEM customers. It is also very difficult to determine the future impact, if any, of
product certifications and qualifications on our revenues.

Net Revenues by Geographic Territory

Our net revenues by geographic territory based on billed-to location were as follows:

Net Revenues by Geographic Territory

Three Months

Three Months

Ended

Percentage

Ended

Percentage

March 27,

of Net

March 28,

of Net

Increase/

Percentage

(in thousands)

2011

Revenues

2010

Revenues

(Decrease)

Change

Asia Pacific

$

58,827

53

%

$

33,517

33

%

$

25,310

76

%

United States

33,858

30

%

35,582

35

%

(1,724

)

(5

)%

Europe, Middle East, and Africa

17,268

15

%

32,309

32

%

(15,041

)

(47

)%

Rest of the world

2,129

2

%

796



1,333

167

%

Total net revenues

$

112,082

100

%

$

102,204

100

%

$

9,878

10

%

We believe the increase in Asia Pacific net revenues and decrease in Europe, Middle East, and
Africa (EMEA) net revenues as a percentage of total net revenues for the three months ended March
27, 2011 compared to the three months ended March 28, 2010 was primarily due to our OEM customers
migrating towards using contract manufacturers that are predominately located in Asia Pacific.
However, as we sell to OEMs and distributors who ultimately resell our products to their customers,
the geographic mix of our net revenues may not be reflective of the geographic mix of end-user
demand or installations.

Cost of sales includes the cost of producing, supporting, and managing our supply of quality
finished products. Cost of sales also included approximately $8.5 million and $4.7 million of
amortization of technology intangible assets for the three months ended March 27, 2011 and March
28, 2010, respectively, with approximately $5.1

million in the three months ended March 27, 2011 being related to the ServerEngines
acquisition. Approximately $0.4 million and $0.3 million of share-based compensation expense was
included in cost of sales for the three months ended March 27, 2011 and March 28, 2010,
respectively.
The remaining decrease was primarily due to an unfavorable mix of
lower margin products sold during the three months ended March 27,
2011, combined with the consumption of previously reserved excess
inventories in the prior year quarter that did not reoccur in the
current year quarter.

Engineering and Development. Engineering and development expenses consisted primarily of
salaries and related expenses for personnel engaged in the design, development, and support of our
products. These expenses included third-party fees paid to consultants, prototype development
expenses, and computer service costs related to supporting computer tools used in the design
process. Engineering and development expenses were as follows (in thousands):

Engineering and Development

Three Months Ended

Percentage of

Three Months Ended

Percentage of

Increase/

Percentage

March 27, 2011

Net Revenues

March 28, 2010

Net Revenues

(Decrease)

Points Change

$42,660

38%

$31,338

31%

$11,322

7%

Engineering and development expenses for the three months ended March 27, 2011 compared to the
three months ended March 28, 2010 increased approximately $11.3 million, or 36%. Approximately $3.2
million and $1.7 million of share-based compensation expense were included in engineering and
development costs for the three months ended March 27, 2011 and March 28, 2010, respectively, with
approximately $0.5 million in the three months ended March 27, 2011 being related to the
ServerEngines acquisition. Engineering and development headcount increased to 629 at March 27, 2011
from 454 at March 28, 2010 primarily due to the acquisition of ServerEngines. The increase in
headcount resulted in a net increase of approximately $5.9 million in salary and related expenses
as compared to the same period in fiscal 2010. The remaining increase
was primarily due to an increase in
costs associated with new product development of approximately $2.0 million and an increase in
design tool costs of approximately $0.5 million.

Selling and Marketing. Selling and marketing expenses consisted primarily of salaries,
commissions, and related expenses for personnel engaged in the marketing and sales of our products,
as well as trade shows, product literature, promotional support costs, and other advertising
related costs. Sales and marketing expenses were as follows (in thousands):

Selling and Marketing

Three Months Ended

Percentage of

Three Months Ended

Percentage of

Increase/

Percentage

March 27, 2011

Net Revenues

March 28, 2010

Net Revenues

(Decrease)

Points Change

$15,346

14%

$13,743

13%

$1,603

1%

Selling and marketing expenses for the three months ended March 27, 2011 compared to the three
months ended March 28, 2010 increased approximately $1.6 million, or 12%. Approximately $1.3
million and $1.2 million of share-based compensation expense were included in selling and marketing
costs for the three months ended March 27, 2011 and March 28, 2010, respectively. Selling and
marketing headcount increased to 138 at March 27, 2011 from 130 at March 28, 2010. The increase in
headcount resulted in a net increase of approximately $0.3 million in salary and related expenses
as compared to the same period in fiscal 2010. The remaining increase in selling and marketing
expenses during the three months ended March 27, 2011 was primarily due to an increase in
performance based compensation of approximately $0.9 million. We will continue to closely manage
and target advertising, market promotions, and heighten brand awareness of our new and existing
products in an effort to provide overall revenue growth.

General and Administrative. Ongoing general and administrative expenses consisted primarily of
salaries and related expenses for executives, financial accounting support, human resources,
administrative services, professional fees, and other corporate expenses. General and
administrative expenses were as follows (in thousands):

General and Administrative

Three Months Ended

Percentage of

Three Months Ended

Percentage of

Increase/

Percentage

March 27, 2011

Net Revenues

March 28, 2010

Net Revenues

(Decrease)

Points Change

$12,106

11%

$12,099

12%

$7

(1)%

General and administrative expenses for the three months ended March 27, 2011 compared to the
three months ended March 28, 2010 did not change significantly. Approximately $2.5 million and $1.4
million of share-based compensation expense were included in general and administrative costs for
the three months ended March 27, 2011 and March 28, 2010, respectively, with approximately $0.8
million in the three months ended March 27, 2011 being

related to the ServerEngines acquisition. General and administrative headcount increased to
141 at March 27, 2011 from 126 at March 28, 2010. The increase in headcount resulted in a net
increase of approximately $0.7 million in salary and related expenses as compared to the same
period in fiscal 2010. The remaining change was primarily due to a decrease in litigation costs of
approximately $1.9 million.

Amortization of Other Intangible Assets. Amortization of other intangible assets consisted of
amortization of intangible assets such as patents, customer relationships, tradenames with
estimable lives, covenants not to compete, and backlog. Amortization expense was as follows (in
thousands):

Amortization of Other Intangible Assets

Three Months Ended

Percentage of

Three Months Ended

Percentage of

Increase/

Percentage

March 27, 2011

Net Revenues

March 28, 2010

Net Revenues

(Decrease)

Points Change

$2,231

2%

$1,698

2%

$533



Amortization of other intangible assets for the three months ended March 27, 2011 compared to
the three months ended March 28, 2010 increased by approximately $0.5 million, or 31%. The increase
was primarily due to amortization expense of intangible assets acquired from ServerEngines of
approximately $0.8 million.

In Process Research and Development Impairment. In process research and development impairment
represents impairment of an in-process research and development intangible asset. Our impairment
of in process research and development was as follows (in thousands):

Impairment of Other Intangible Assets

Three Months Ended

Percentage of

Three Months Ended

Percentage of

Increase/

Percentage

March 27, 2011

Net Revenues

March 28, 2010

Net Revenues

(Decrease)

Points Change

$6,000

5%





$6,000

5%

During the three months ended March 27, 2011, the business climate for the product associated
with the IPR&D from the acquisition of a privately-held company in fiscal 2010, deteriorated
significantly as the technology was no longer expected to be designed
into customer products and was determined to be other than temporary and thus, the entire amount of the IPR&D of
approximately $6.0 million was impaired during the three months ended March 27, 2011.

Our nonoperating expense, net, for the three months ended March 27, 2011 compared to the three
months ended March 28, 2010 increased by approximately $9.1 million, or 5,474%. The increase in
nonoperating expense was primarily due the impairment of our equity investment in a privately-held
company of approximately $9.2 million during the three months ended March 27, 2011. During the
three months ended March 27, 2011, the business climate of the privately-held company deteriorated
significantly as the technology was no longer expected to be designed
into customer products and was determined to be other than temporary and thus, the fair value of the
privately-held company was deemed to be zero. As a result, the entire investment of approximately
$9.2 million in the privately-held company was impaired.

Income Taxes. Income taxes were as follows (in thousands):

Income Taxes

Three Months Ended

Percentage of

Three Months Ended

Percentage of

Increase/

Percentage

March 27, 2011

Net Revenues

March 28, 2010

Net Revenues

(Decrease)

Points Change

$(7,448)

(7)%

$(7,933)

(8)%

$485

1%

Income taxes recorded were a benefit for the three months ended March 27, 2011 and remained
relatively unchanged compared to the three months ended March 28, 2010. Our effective tax rate was
a benefit of approximately 29% for the three months ended March 27, 2011 compared to a benefit of
approximately 148% for the three months ended March 28, 2010. The decrease in tax benefit rate
for the three months ended March 27, 2011 was primarily due to an increase in non-deductible
charges and lower income before taxes compared to the same period in the prior year. The decrease
in the tax benefits was primarily due to a non-recurring tax benefit in

the prior year of approximately $5.7 million related to domestic production activities
deductions for amended tax returns for 2005 through 2007, an increase in taxes of approximately
$1.5 million from non-deductible impairment charges, and an increase in taxes of approximately $1.4
million from non-deductible stock-based compensation expense for contingent shares related to the
ServerEngines. The decrease in tax benefits was partially offset by an increase in tax benefits of
approximately $9.3 million due to change in the geographic mix of taxable income between domestic
and foreign jurisdictions combined with an increase of approximately $1.5 million in tax benefits
from Federal research credits due to a retroactive extension of the Federal research credit in
December 2010 as part of the Tax Relief, Unemployment Insurance Reauthorization and Job Creation
Act of 2010. These tax items may not recur in future periods.

Net Revenues. Net revenues for the nine months ended March 27, 2011, increased by
approximately $33.2 million, or 11%, to approximately $329.2 million compared to approximately
$296.0 million for the nine months ended March 28, 2010.

Net Revenues by Product Line

Net revenues by product line were as follows:

Net Revenues by Product Line

Nine Months

Nine Months

Ended

Percentage

Ended

Percentage

March 27,

of Net

March 28,

of Net

Increase/

Percentage

(in thousands)

2011

Revenues

2010

Revenues

(Decrease)

Change

Host Server Products

$

255,992

78

%

$

215,792

73

%

$

40,200

19

%

Embedded Storage Products

73,002

22

%

79,906

27

%

(6,904

)

(9

)%

Other

183



323



(140

)

(43

)%

Total net revenues

$

329,177

100

%

$

296,021

100

%

$

33,156

11

%

For the nine months ended March 27, 2011, our Fibre Channel based products accounted for the
vast majority of our HSP revenues. The increase in our HSP net revenue for the nine months ended
March 27, 2011 compared to the nine months ended March 28, 2010 was mainly due to an increase of
approximately 171% in units shipped partially offset by a decrease in average selling price of
approximately 56%. The significant increase in units shipped and decrease in average selling price
was primarily due to the inclusion of sales resulting from the acquisition of ServerEngines on
August 25, 2010, which accounted for no revenues in the same period in the prior year and had a
significantly lower average selling price compared to other Emulex products along with the growth
in Fibre Channel products.

The slight decrease in our ESP net revenue for the nine months ended March 27, 2011 compared
to the nine months ended March 27, 2011 was primarily due to a decrease in units shipped of
approximately 6% combined with a decrease in average selling price of approximately 3%.

Net Revenues by Major Customers

In addition to direct sales, some of our larger OEM customers purchase or market products
indirectly through distributors, resellers or other third parties. If these indirect sales are
purchases of customer-specific models, we are able to track these sales. However, if these indirect
sales are purchases of our standard models, we are not able to distinguish them by OEM customer.
Customers whose direct net revenues, or total direct and indirect net revenues (including
customer-specific models purchased or marketed indirectly through distributors, resellers and other
third parties), exceeded 10% of our net revenues were as follows:

Customer-specific models purchased or marketed indirectly through distributors, resellers,
and other third parties are included with the OEMs revenues in these columns rather than as
revenue for the distributors, resellers or other third parties.

Direct sales to our top five customers accounted for approximately 62% of total net revenues
for the nine months ended March 27, 2011, compared to approximately 58% for the nine months ended
March 28, 2010. Direct and indirect sales to our top five customers accounted for approximately 77%
of total net revenues for the nine months ended March 27, 2011, compared to approximately 72% for
the nine months ended March 28, 2010. Our net revenues from customers can be significantly impacted
by changes to our customers business and their business models.

Net Revenues by Sales Channel

Net revenues by sales channel were as follows:

Net Revenues by Sales Channel

Nine Months

Nine Months

Ended

Percentage

Ended

Percentage

March 27,

of Net

March 28,

of Net

Increase/

Percentage

(in thousands)

2011

Revenues

2010

Revenues

(Decrease)

Change

OEM

$

283,945

86

%

$

249,498

84

%

$

34,447

14

%

Distribution

45,204

14

%

46,214

16

%

(1,010

)

(2

)%

Other

28



309



(281

)

(91

)%

Total net revenues

$

329,177

100

%

$

296,021

100

%

$

33,156

11

%

The increase in OEM net revenues for the nine months ended March 27, 2011 compared to the nine
months ended March 28, 2010 was primarily due to an increase of approximately 24% in HSP revenues
generated through our OEMs. Distribution net revenues for the nine months ended March 27, 2011 did
not change significantly compared to the nine months ended March 28, 2010.

Net Revenues by Geographic Territory

Our net revenues by geographic territory based on billed-to location were as follows:

Net Revenues by Geographic Territory

Nine Months

Nine Months

Ended

Percentage

Ended

Percentage

March 27,

of Net

March 28,

of Net

Increase/

Percentage

(in thousands)

2011

Revenues

2010

Revenues

(Decrease)

Change

Asia Pacific

$

160,306

49

%

$

102,855

35

%

$

57,451

56

%

United States

99,181

30

%

95,672

32

%

3,509

4

%

Europe, Middle East, and Africa

63,985

19

%

93,396

32

%

(29,411

)

(32

)%

Rest of the world

5,705

2

%

4,098

1

%

1,607

39

%

Total net revenues

$

329,177

100

%

$

296,021

100

%

$

33,156

11

%

We believe the increase in Asia Pacific net revenues and decrease in Europe, Middle East, and
Africa (EMEA) net revenues as a percentage of total net revenues for the nine months ended March
27, 2011 compared to the nine months ended March 28, 2010 was primarily due to our OEM customers
migrating towards using contract manufacturers that are predominately located in Asia Pacific. The
United States net revenues as a percentage of total net revenues essentially remained unchanged.
However, as we sell to OEMs and distributors who ultimately resell our products to their customers,
the geographic mix of our net revenues may not be reflective of the geographic mix of end-user
demand or installations.

Cost of sales includes the cost of producing, supporting, and managing our supply of quality
finished products. Cost of sales also included approximately $24.6 million and $14.2 million of
amortization of technology intangible assets for the nine months ended March 27, 2011 and March 28,
2010, respectively, with approximately $11.9 million in the nine months ended March 27, 2011 being
related to the ServerEngines acquisition. Cost of sales includes retrospective adjustments for
amortization of technology intangible assets of approximately $0.3 million and $0.8 million for the
three months ended September 26, 2010 and December 27, 2010, respectively. Approximately $1.3
million and $0.9 million of share-based compensation expense was included in cost of sales for the
nine months ended March 27, 2011 and March 28, 2010, respectively.
The remaining decrease was primarily due to an unfavorable mix of
lower margin products sold during the nine months ended March 27,
2011.

Engineering and Development. Engineering and development expenses consisted primarily of
salaries and related expenses for personnel engaged in the design, development, and support of our
products. These expenses included third-party fees paid to consultants, prototype development
expenses, and computer service costs related to supporting computer tools used in the design
process. Engineering and development expenses were as follows (in thousands):

Engineering and Development

Nine Months Ended

Percentage of

Nine Months Ended

Percentage of

Increase/

Percentage

March 27, 2011

Net Revenues

March 28, 2010

Net Revenues

(Decrease)

Points Change

$122,592

37

%

$

94,417

32

%

$

28,175

5

%

Engineering and development expenses for the nine months ended March 27, 2011 compared to the
nine months ended March 28, 2010 increased approximately $28.2 million, or 30%. Approximately $12.7
million and $5.4 million of share-based compensation expense were included in engineering and
development costs for the nine months ended March 27, 2011 and March 28, 2010, respectively, with
approximately $5.8 million being related to the ServerEngines acquisition. Engineering and
development headcount increased to 629 at March 27, 2011 from 454 at March 28, 2010 primarily due
to the acquisition of ServerEngines. The increase in headcount resulted in a net increase of
approximately $12.5 million in salary and related expenses as compared to the same period in fiscal
2010. The remaining increase was primarily due to an increase in costs associated with new product
development of approximately $3.7 million, an increase in design tool costs of approximately $1.2
million, and an increase in travel related expense of approximately $0.5 million.

Selling and Marketing. Selling and marketing expenses consisted primarily of salaries,
commissions, and related expenses for personnel engaged in the marketing and sales of our products,
as well as trade shows, product literature, promotional support costs, and other advertising
related costs. Sales and marketing expenses were as follows (in thousands):

Selling and Marketing

Nine Months Ended

Percentage of

Nine Months Ended

Percentage of

Increase/

Percentage

March 27, 2011

Net Revenues

March 28, 2010

Net Revenues

(Decrease)

Points Change

$42,281

13

%

$

42,415

14

%

$

(134

)

(1

)%

Selling and marketing expenses for the nine months ended March 27, 2011 compared to the nine
months ended March 28, 2010 decreased approximately $0.1 million. Approximately $3.6 million and
$2.6 million of share-based compensation expense were included in selling and marketing costs for
the nine months ended March 27, 2011 and March 28, 2010, respectively. Selling and marketing
headcount increased to 138 at March 27, 2011 from 130 at March 28, 2010. The increase in headcount
resulted in a net increase of approximately $1.0 million in salary and related expenses as compared
to the same period in fiscal 2010. The decrease in selling and marketing expenses during the nine
months ended March 27, 2011 was primarily due to a decrease in performance based compensation of
approximately $1.7 million and a decrease in outside services of approximately $0.9 million,
partially offset by an increase in advertising and travel expenses of approximately $0.4 million.
We will continue to closely manage and

target advertising, market promotions, and heighten brand awareness of our new and existing
products in an effort to provide overall revenue growth.

General and Administrative. Ongoing general and administrative expenses consisted primarily of
salaries and related expenses for executives, financial accounting support, human resources,
administrative services, professional fees, and other corporate expenses. General and
administrative expenses were as follows (in thousands):

General and Administrative

Nine Months Ended

Percentage of

Nine Months Ended

Percentage of

Increase/

Percentage

March 27, 2011

Net Revenues

March 28, 2010

Net Revenues

(Decrease)

Points Change

$43,388

13

%

$

36,274

12

%

$

7,114

1

%

General and administrative expenses for the nine months ended March 27, 2011 compared to the
nine months ended March 28, 2010 increased approximately $7.1 million, or 20%. Approximately $13.7
million and $4.3 million of share-based compensation expense were included in general and
administrative costs for the nine months ended March 27, 2011 and March 28, 2010, respectively,
with approximately $9.5 million in the nine months ended March 27, 2011 being related to the
ServerEngines acquisition. General and administrative headcount increased to 141 at March 27, 2011
from 126 at March 28, 2010. The increase in headcount resulted in a net increase of approximately
$0.8 million in salary and related expenses as compared to the same period in fiscal 2010. The
remaining change was primarily due to a decrease in performance based compensation of approximately
$1.0 million, a decrease in litigation costs of approximately $0.6 million, and a decrease in loss
on disposal of assets of approximately $0.6 million.

Amortization of Other Intangible Assets. Amortization of other intangible assets consisted of
amortization of intangible assets such as patents, customer relationships, tradenames with
estimable lives, covenants not to compete, and backlog. Amortization expense was as follows (in
thousands):

Amortization of Other Intangible Assets

Nine Months Ended

Percentage of

Nine Months Ended

Percentage of

Increase/

Percentage

March 27, 2011

Net Revenues

March 28, 2010

Net Revenues

(Decrease)

Points Change

$7,013

2

%

$

5,094

2

%

$

1,919



Amortization of other intangible assets for the nine months ended March 27, 2011 compared to
the nine months ended March 28, 2010 increased by approximately $1.9 million, or 38% primarily due
to amortization expense of intangible assets acquired from ServerEngines. Amortization expense
includes retrospective adjustments of approximately $0.3 million and $0.8 million to the three
months ended September 26, 2010 and December 27, 2010, respectively.

In Process Research and Development Impairment. In process research and development impairment
represents impairment of an in-process research and development intangible asset. Our impairment
of in process research and development was as follows (in thousands):

Impairment of Other Intangible Assets

Nine Months Ended

Percentage of

Nine Months Ended

Percentage of

Increase/

Percentage

March 27, 2011

Net Revenues

March 28, 2010

Net Revenues

(Decrease)

Points Change

$6,000

2

%





$

6,000

2

%

During the nine months ended March 27, 2011, the business climate for the product associated
with the IPR&D from the acquisition of a privately-held company in fiscal 2010, deteriorated
significantly as the technology was no longer expected to be designed
into customer products and was determined to be other than temporary and thus, the entire amount of the IPR&D of
approximately $6.0 million was impaired during the nine months ended March 27, 2011.

Our nonoperating (expense) income, net, for the nine months ended March 27, 2011 compared to
the nine months ended March 28, 2010 decreased approximately $9.9 million, or 7,096%. The decrease
in nonoperating income was primarily due the impairment of our equity investment in a
privately-held company of approximately $9.2 million during the nine months ended March 27, 2011.
During the nine months ended March 27, 2011, the business climate of the privately-held company
deteriorated significantly as the technology was no longer expected to be designed
into customer products and was determined to be other than temporary and thus, the fair value of
the privately-held company was deemed to be zero. As a result, the entire investment of
approximately $9.2 million in the privately-held company was impaired.

Income Taxes. Income taxes were as follows (in thousands):

Income Taxes

Nine Months Ended

Percentage of

Nine Months Ended

Percentage of

Increase/

Percentage

March 27, 2011

Net Revenues

March 28, 2010

Net Revenues

(Decrease)

Points Change

$17,799

5

%

$

(20,839

)

(7

)%

$

38,638

12

%

Our effective tax rate was approximately 36% for the nine months ended March 27, 2011 compared to a
benefit of approximately 397% for the nine months ended March 28, 2010. During the nine months
ended March 27, 2011, one of our domestic entities entered into a platform contribution transaction
with an international subsidiary to license the recently acquired ServerEngines technology,
resulting in an increase in U.S. income taxes of approximately $36.9 million. The remaining
increase was primarily due to a decrease in tax benefits from a non-recurring tax benefit in the
prior year of approximately $5.7 million related to domestic production activities deductions for
amended tax returns for 2005 through 2007, an increase in taxes of approximately $5.1 million from
non-deductible stock-based compensation expense for contingent shares related to the ServerEngines
acquisition, a decrease in tax benefits due to a non-recurring tax benefit in the prior year of
approximately $4.0 million related to the stock option exchange program, and an increase in taxes
of approximately $1.5 million due to non-deductible impairment charges. The increase in taxes was
partially offset by an increase in tax benefits of approximately $12.0 million due to a change in
the geographic mix of taxable income between domestic and foreign jurisdictions combined with an
increase of approximately $3.8 million in tax benefits from Federal research credits due to a
retroactive extension of the Federal research credit in December 2010 as part of the Tax Relief,
Unemployment Insurance Reauthorization and Job Creation Act of 2010. These tax items may not recur
in future periods.

Critical Accounting Policies

The preparation of the consolidated financial statements requires estimation and judgment that
affect the reported amounts of net revenues, expenses, assets, and liabilities in accordance with
accounting principles generally accepted in the United States. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the
circumstances and which form the basis for making judgments about the carrying values of assets and
liabilities. Critical accounting policies are defined as those that are reflective of significant
judgments and uncertainties.

We believe the following are critical accounting policies and require us to make significant
judgments and estimates in the preparation of our consolidated financial statements: revenue
recognition; warranty; allowance for doubtful accounts; intangible assets and other long-lived
assets; inventories; goodwill; income taxes; stock-based compensation; and litigation costs.
Changes in judgments and uncertainties could potentially result in materially different results
under different assumptions and conditions. If these estimates differ significantly from actual
results, the impact to the consolidated financial statements may be material.

Revenue Recognition. We generally recognize revenue at the time of shipment when title and
risk of loss have passed, evidence of an arrangement has been obtained, pricing is fixed or
determinable, and collectibility is reasonably assured (Basic Revenue Recognition Criteria). We
make certain sales through two tier distribution channels and have various distribution agreements
with selected distributors and Master Value Added Resellers (collectively, the Distributors). These
distribution agreements may be terminated upon written notice by either party. Additionally, these
Distributors are generally given privileges to return a portion of inventory and to participate in
price protection and cooperative marketing programs. Therefore, we recognize revenue on our
standard products

sold to our Distributors based on data received from the Distributors and managements
estimates to approximate the point that these products have been resold by the Distributors.
OEM-specific models sold to our Distributors are governed under the related OEM agreements rather
than under these distribution agreements. We recognize revenue at the time of shipment for OEM
specific products shipped to the Distributors when the Basic Revenue Recognition Criteria have been
met. Additionally, we maintain accruals and allowances for price protection and various other
marketing programs. We classify the costs of these incentive programs based on the benefit
received, if applicable, as a reduction of revenue, a cost of sale, or an operating expense.

Warranty. We provide a warranty of between one and five years on our products. We record a
provision for estimated warranty related costs at the time of sale based on historical product
return rates and managements estimates of expected future costs to fulfill our warranty
obligations. We evaluate our ongoing warranty obligation on a quarterly basis.

Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts based upon
historical write-offs as a percentage of net revenues and managements review of outstanding
accounts receivable. Amounts due from customers are charged against the allowance for doubtful
accounts when management believes that collectibility of the amount is unlikely. Although we have
not historically experienced significant losses on accounts receivable, our accounts receivable are
concentrated with a small number of customers. Consequently, any write-off associated with one of
these customers could have a significant impact on our allowance for doubtful accounts and results
of operations.

Intangible Assets and Other Long-Lived Assets. Intangible assets resulting from acquisitions
or licensing agreements are carried at cost less accumulated amortization and impairment charges,
if any. For assets with determinable useful lives, amortization is computed using the straight-line
method over the estimated economic lives of the respective intangible assets, ranging from ten
months to twelve years. Furthermore, we assess whether our long-lived assets, including intangible
assets and equity investment in a privately-held company recorded under the cost method, should be
tested for recoverability periodically and whenever events or circumstances indicate that their
carrying value may not be recoverable. The amount of impairment, if any, is measured based on fair
value, which is determined using projected discounted future operating cash flows. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less selling costs.

Inventories. Inventories are stated at the lower of cost, on a first-in, first-out basis, or
market. We use a standard cost system to determine cost. The standard costs are adjusted
periodically to represent actual cost. We regularly compare forecasted demand and the composition
of the forecast against inventory on hand and open purchase commitments in an effort to ensure that
the carrying value of inventory does not exceed net realizable value. Accordingly, we may have to
reduce the carrying value of excess and obsolete inventory if forecasted demand decreases.

Goodwill. Goodwill is not amortized, but instead is tested at least annually for impairment,
or more frequently when events or changes in circumstances indicate that goodwill might be
impaired. Management considers our business as a whole to be its reporting unit for purposes of
testing for impairment. This impairment test is performed annually during the fourth fiscal
quarter. As of March 27, 2011, the fair value of the reporting unit substantially exceeded its
carrying value.

A two-step test is used to identify the potential impairment and to measure the amount of
goodwill impairment, if any. The first step is to compare the fair value of the reporting unit with
its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its
carrying amount, goodwill is considered not impaired; otherwise, goodwill is impaired and the loss
is measured by performing step two. Under step two, the impairment loss is measured by comparing
the implied fair value of the reporting unit goodwill with the carrying amount of goodwill.

A preliminary purchase price allocation was recorded during the nine months ended March 27,
2011 related to the ServerEngines acquisition that was completed on August 25, 2010, adding
approximately $85.7 million to goodwill. We will continue to
monitor whether there are potential indicators of
impairment.

Income Taxes. We account for income taxes using the asset and liability method, under which we
recognize deferred tax assets and liabilities for the future tax consequences attributable to
temporary differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and for net operating loss and tax credit carryforwards.
Tax positions that meet a more-likely-than-not recognition threshold are recognized in the
financial statements.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. As a multinational corporation, we are
subject to complex tax laws and regulations in various jurisdictions. The application of tax laws
and regulations is subject to legal and factual interpretation, judgment, and uncertainty. Tax laws
themselves are subject to change as a result of changes in fiscal policy, changes in legislation,
evolution of regulations and court rulings. Therefore, the actual liability for U.S. or foreign
taxes may be materially different from our estimates, which could result in the need to record
additional liabilities or potentially to reverse previously recorded tax liabilities.

Stock-Based Compensation. We account for our stock-based awards to employees and non-employees
using the fair value method. Stock-based compensation cost is measured at grant date, based on the
fair value of the award, and is recognized as expense over the requisite service period. The fair
value of each unvested stock award is determined based on the closing price of our common stock at
grant date. For stock options, the measurement of stock-based compensation cost is based on several
criteria including, but not limited to, the valuation model used and associated input factors such
as expected term, stock price volatility, dividend rate, risk free interest rate, and award
forfeiture rate. The input factors used in the valuation model are based on subjective future
expectations combined with management judgment. If there is a difference between the forfeiture
assumptions used in determining stock-based compensation costs and the actual forfeitures, which
become known over time, we may change the assumptions used in determining stock-based compensation
costs. These changes may materially impact our results of operations in the period such changes are
made. See Note 11 in the accompanying notes to consolidated financial statements contained
elsewhere herein for additional information and related disclosures.

Litigation Costs. We record a charge equal to at least the minimum estimated liability for a
loss contingency when both of the following conditions are met: (i) information available prior to
issuance of the financial statements indicates that it is probable that an asset had been impaired
or a liability had been incurred at the date of the financial statements and (ii) the range of loss
can be reasonably estimated. Legal and other litigation related costs are recognized as the
services are provided. We record insurance recoveries for litigation costs for which both
conditions are met: (i) the recovery is probable and (ii) collectability is reasonably assured. The
insurance recoveries recorded are only to the extent the litigation costs have been incurred and
recognized in the financial statements; however, it is reasonably possible that the actual recovery
may be significantly different from our estimates. There are many uncertainties associated with any
litigation, and we cannot provide assurance that any actions or other third party claims against us
will be resolved without costly litigation or substantial settlement charges. If any of those
events were to occur, our business, financial condition and results of operations could be
materially and adversely affected.

Recently Issued Accounting Standards

See Note 1 in the accompanying notes to consolidated financial statements for a description of
the recently issued accounting standards.

Liquidity and Capital Resources

At March 27, 2011, we had approximately $233.1 million in working capital and approximately
$182.8 million in cash and cash equivalents and current investments. At June 27, 2010, we had
approximately $357.1 million in working capital and approximately $294.8 million in cash and cash
equivalents and current investments. We maintain an investment portfolio of various security
holdings, types, and maturities. We invest in instruments that meet credit quality standards in
accordance with our investment guidelines. We limit our exposure to any one issuer or type of
investment with the exception of U.S. Government issued or U.S. Government sponsored entity
securities. Our investments consisted mostly of term deposits, fixed income securities and
corporate bonds as of March 27, 2011 and we did not hold any auction rate securities or direct
investments in mortgage-backed securities. We have primarily funded our cash needs from continuing
operations. As part of our global initiatives, we currently plan to continue our strategic
investment in research and development, sales and marketing, capital equipment, and facilities. We
may also consider internal and external investment opportunities in order to achieve our growth and
market leadership goals, including licensing and joint-development agreements with our suppliers,
customers, and other third parties.

In early August 2008, our Board of Directors authorized a plan to repurchase up to $100.0
million of our outstanding common stock. In April 2009, upon receipt of an unsolicited takeover
proposal and related tender offer of Broadcom Corporation to acquire us, our Board of Directors
elected to temporarily suspend any activity under the share repurchase plan. In light of Broadcom
allowing its tender offer to expire on July 14, 2009, Emulexs Board of Directors elected to
reactivate the $100.0 million share repurchase plan effective July 15, 2009. As of March 27, 2011,
the Company has repurchased 6.1 million shares of its common stock for an aggregate purchase price
of approximately $58.3 million or an average of $9.55 per share under this plan, of which
approximately 4.1 million shares for an aggregate purchase price of approximately $40.1 million or
an average of $9.76 was purchased during the nine months ended March 27, 2011.

We believe that our existing cash and cash equivalents, current investments, and anticipated
cash flows from operating activities will be sufficient to support our working capital needs and
capital expenditure requirements for at least the next 12 months. We currently do not have any
outstanding lines of credit or other borrowings.

Cash provided by operating activities during the nine months ended March 27, 2011 was
approximately $27.6 million compared to approximately $41.8 million during the nine months ended
March 28, 2010. The current period cash provided by operating activities was primarily due to a net
loss of approximately $67.6 million before adjustments for share-based compensation expense of
approximately $31.4 million, amortization of intangible assets of approximately $31.6 million,
depreciation and amortization of property and equipment of approximately $15.9 million, impairment
of strategic investment of approximately $9.2 million, and
in-process research and development impairment of approximately $6.0 million. The
remaining increase in cash was primarily due to an increase in prepaid expenses and other assets of
approximately $12.5 million, and an increase in income taxes payable and prepaid taxes of approximately
$10.1 million, partially offset by a decrease in accounts
payable, accrued liabilities, and other
liabilities of approximately $8.9
million, a decrease in accounts and other receivables of approximately
$6.8 million, and a decrease in inventories of approximately $3.9 million.

Cash used in investing activities during the nine months ended March 27, 2011 was
approximately $35.0 million compared to approximately $64.0 million during the nine months ended
March 28, 2010. The current period usage of cash was primarily due to payments to the shareholders
of ServerEngines in connection with the acquisition of approximately $53.1 million, net of cash
acquired, purchases of property and equipment of approximately $16.0 million, payment pursuant to a
licensing arrangement with a third party of approximately $4.0 million, partially offset by
maturities of investments that were not reinvested.

Cash used in financing activities for the nine months ended March 27, 2011 was approximately
$66.8 million compared to approximately $18.5 million for the nine months ended March 28, 2010. The
current period usage of cash was primarily due to the purchase of treasury stock of approximately
$40.1 million and the retirement of debt to the founders of ServerEngines in connection with the
acquisition of approximately $26.9 million.

We have disclosed outstanding legal proceedings in Note 9 to our condensed consolidated
financial statements. Although we cannot be certain of the outcome of any litigation, we currently
believe the final resolution of outstanding litigation will not have a material adverse effect on
the Companys liquidity or capital resources.

The following summarizes our contractual obligations as of March 27, 2011 and the effect such
obligations are expected to have on our liquidity in future periods. The estimated payments
reflected in this table are based on managements estimates and assumptions about these
obligations. Because these estimates and assumptions are necessarily subjective, the actual cash
outflows in future periods will vary, possibly materially, from those reflected in the table.

Consists primarily of commitments for non-recurring engineering services of
approximately $6.6 million but excludes approximately $35.4 million of liabilities for
uncertain tax positions for which we cannot make a reasonably reliable estimate of the
period of payment.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

Our cash and cash equivalents are not subject to significant interest rate risk due to their
short terms to maturity. As of March 27, 2011, the carrying value of our cash and cash equivalents
approximated fair value.

As of March 27, 2011, our investment portfolio of approximately $8.0 million consisted
primarily of term deposits, fixed income securities, and corporate bonds. We have the positive
intent and ability to hold these securities to maturity. We did not hold any auction rate
securities or direct investments in mortgage-backed securities as of March 27, 2011.

The fair market value of our investment portfolio is subject to interest rate risk and would
decline in value if market interest rates increased. If market interest rates were to increase
immediately and uniformly by 10% from the levels existing as of March 27, 2011, the decline in the
fair value of the portfolio would not be material to our financial position, results of operations
and cash flows. However, if interest rates decreased and securities within our portfolio were
re-invested in securities with lower interest rates, interest income would decrease in the future.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including the Chief
Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our
disclosure controls and procedures as required by Exchange Act Rule 13a-15(b) as of the end of the
period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that these disclosure controls and procedures are effective.

There were no changes in our internal control over financial reporting that occurred during
the three months ended March 27, 2011, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.

On September 14, 2009, Broadcom Corporation filed a patent infringement lawsuit against the
Company in the United States District Court in the Central District of California. The original
complaint alleged that the Company is infringing 10 Broadcom patents covering certain data and
storage networking technologies. On February 23, 2010, Broadcom filed a first amended complaint.
The first amended complaint alleges that the Company is infringing 12 Broadcom patents covering
certain data and storage networking technologies. The complaint seeks declaratory and injunctive
relief, monetary damages, and interest and costs, including attorneys and expert fees. On March
25, 2010, the Company filed its answer and affirmative defenses to the first amended complaint
alleging that it believes that the Broadcom patents at issue are invalid or not infringed, or both.
In addition, the Company has asserted counterclaims for declaratory judgment of invalidity and
non-infringement against each of the Broadcom patents at issue, and seeks award of attorneys fees,
costs, and expenses. On January 11, 2010, the Court set a trial date of September 20, 2011. On
February 12, 2010, Broadcom sought permission to amend its complaint to assert an additional
patent, making the total patents asserted as 11 instead of 10. On March 25, 2010, Emulex filed an
answer to the amended Broadcom complaint. On April 2, 2010, Broadcom filed a disclosure of
infringement contentions.

On May 26, 2010, Broadcom Corporation filed a separate patent infringement lawsuit against the
Company in the United States District Court in the Central District of California. The 2010 lawsuit
asserts that certain Emulex products are infringing on a Broadcom patent covering certain data and
storage networking technologies. Broadcom seeks a judgment for damages, injunctive relief, and an
award of attorneys fees and costs. On June 30, 2010, the Judge stated that the 2009 and 2010
patent cases would be consolidated into a single lawsuit. On October 14, 2010, the Court issued an
order on the parties joint stipulation dismissing three patents from the case. On November 1,
2010, the Court issued an order allowing Broadcom to make infringement assertions against
additional Emulex products. In a Court ruling dated December 17, 2010, there are interpretations of
certain terms contained in the claims of the patents being asserted by Broadcom. On February 22,
2011, the Court issued an order on the parties joint stipulation dismissing one patent from the
case (leaving 8 patents in the case). The status of this matter does not allow management of the
Company to determine whether a loss will occur or estimate the range of such a loss. Accordingly,
management has determined that a potential loss is not probable and no amount has been accrued.

On November 9, 2009, the Company filed a lawsuit against Broadcom Corporation alleging that
Broadcom has acted in an anticompetitive manner in violation of federal antitrust laws, as well as
made defamatory statements and engaged in acts of unfair competition. The complaint seeks actual
and punitive damages, attorneys fees and costs, and injunctive relief against Broadcom. On January
4, 2010, the Company filed an amended complaint. The amended complaint alleges that Broadcom has
acted in an anticompetitive manner in violation of federal antitrust laws and made defamatory
statements. The amended complaint seeks actual and punitive damages, attorneys fees and costs, and
injunctive relief. On June 7, 2010, the Court denied Broadcoms motion to dismiss Emulexs first
amended complaint and to strike Emulexs defamation claim.

On November 15, 2001, prior to the Companys acquisition of Vixel Corporation, a securities
class action was filed in the United States District Court in the Southern District of New York as
Case No. 01 CIV. 10053 (SAS), Master File No. 21 MC92 (SAS) against Vixel and two of its officers
and directors (one of which is James M. McCluney, the Companys current Chief Executive Officer)
and certain underwriters who participated in the Vixel initial public offering in late 1999. The
amended complaint alleged violations under Section 10(b) of the Exchange Act and Section 11 of the
Securities Act and sought unspecified damages on behalf of persons who purchased Vixel stock during
the period October 1, 1999 through December 6, 2000. On April 2, 2009, the parties signed a
Stipulation and Agreement of Settlement (the 2009 Settlement) to the District Court for preliminary
approval. The District Court granted the plaintiffs motion for preliminary approval and
preliminarily certified the settlement classes on June 10, 2009. The settlement fairness hearing
was held on September 10, 2009. On October 6, 2009, the District Court entered an opinion granting
final approval to the settlement and directing that the Clerk of the District Court close these
actions. The 2009 Settlement provides for a settlement amount of $586 million, and Emulex has no
obligation to pay any part of that amount. Notices of appeal of the opinion granting final approval
were originally filed by six groups of appellants, four of whom have settled with plaintiffs.

In addition to the ongoing litigation discussed above, the Company is involved in various
claims and legal actions arising in the ordinary course of business. In the opinion of management,
the ultimate disposition of the open matters will not have a material adverse effect on the
Companys consolidated financial position, results of operations or liquidity.

Item 1A. Risk Factors

Any
failure to successfully operate our business integrated with our recent acquisition of ServerEngines Corporation
(ServerEngines) and any failure to successfully integrate future strategic acquisitions could adversely affect our business.

Our
future performance will depend in part on whether we can successfully
operate our business integrated with our
recently acquired ServerEngines business in an effective and efficient manner. Integrating our
business with ServerEngines business will be a complex, time-consuming and expensive process and
involve a number of risks and uncertainties. In addition, in order to position ourselves to take
advantage of growth opportunities, we have made, and may continue to make, other strategic
acquisitions that involve significant risks and uncertainties. The risks and uncertainties relating
to the ServerEngines acquisition and future acquisitions include, but are not limited to:



The difficulty in integrating any newly acquired
businesses and operations in an efficient and effective manner;

The challenges in achieving strategic objectives, cost savings and other benefits
expected from the ServerEngines acquisition and any future acquisitions;



The risk of diverting our resources and the attention of our senior management from the
operations of our business;



Additional demands on management related to the increase in the size and scope of our
company following the acquisition;



The risk that our markets do not evolve as anticipated and the technologies acquired do
not prove to be those needed to be successful in those markets;



Difficulties in combining corporate cultures;



Difficulties in the assimilation and retention of key employees;



Difficulties in maintaining relationships with present and potential customers,
distributors and suppliers of the acquired business;



Costs and expenses associated with any undisclosed or potential liabilities of
ServerEngines or any future acquired business;



Difficulties in converting the acquired business information systems to our systems;



Delays, difficulties or unexpected costs in the integration, assimilation,
implementation or modification of platforms, systems, functions, technologies and
infrastructure to support the combined business, as well as maintaining uniform standards,
controls (including internal accounting controls), procedures and policies;



The risk that the returns on acquisitions will not support the expenditures incurred to
acquire such businesses or the capital expenditures needed to develop such businesses;



The risks of entering markets in which we have less experience;



Unknown defects of an acquired companys products or assets that may not be identified
due to the inherent limitations involved in the due diligence process of an acquisition;
and



The risks of potential disputes concerning indemnities and other obligations that could
result in substantial costs.

Mergers and acquisitions are inherently risky and subject to many factors outside of our
control, and we cannot be certain that our previous or future acquisitions will be successful and
will not materially adversely affect our business, operating results or financial condition. We do
not know whether we will be able to successfully integrate the businesses, products, technologies
or personnel that we might acquire in the future or that any strategic investments we make will
meet our financial or other investment objectives. Any failure to do so could significantly harm
our business, financial condition and results of operations. Even if we are able to integrate any future acquisition successfully, this integration may not result in
the realization of the full benefits of synergies, cost savings, revenue enhancements, growth,
operational efficiencies and other benefits that we expect. We cannot assure you that we will
successfully integrate any future acquisition with our business or
achieve the desired benefits from the ServerEngines acquisition or any future acquisition within a
reasonable period of time or at all.

Furthermore, to complete future acquisitions we may issue equity securities, incur debt,
assume contingent liabilities or have amortization expenses and write-downs of acquired assets,
which could cause our earnings per share to decline.

Third party claims of intellectual property infringement could adversely affect our business.

We believe that our products and technology do not infringe on the intellectual property
rights of others or upon intellectual property rights that may be granted in the future pursuant to
pending applications. We occasionally receive communications from third parties alleging patent
infringement, and there is always the chance that third parties may assert infringement claims
against us.
We are entering technology markets where we have not participated before, and where there are entrenched
incumbents, and where our entrance into the market is disruptive and may cause such incumbents to assert
infringement claims in order to deter our competition.
Any such claims, with or without merit, could result in costly litigation, cause
product shipment delays, result in temporary restraining orders or injunctions concerning the sale of products
in certain countries, require the redesign of products to design around asserted claims,
require us to indemnify customers, or require us to enter into royalty or
licensing agreements, which may or may not be available.
Any such claims, with or without merit, may cause customers to be deterred from purchasing
products from us. We have obtained contractual commitments from our suppliers concerning the
defense and indemnification of claims relating to certain technology provided by such suppliers,
but we cannot be certain that such defense and indemnification obligations will be promptly honored by such suppliers.
Furthermore, we have in the past obtained,
and may be required in the future to obtain, licenses of technology owned by other parties. We
cannot be certain that the necessary licenses will be available or that they can be obtained on
commercially reasonable terms.
We have participated in technology standardization activities which provide for licenses
being available on reasonable and non-discriminatory terms, but we cannot be certain that such
licenses will actually and promptly be made available to us.
If we were to fail to obtain such royalty or licensing agreements in
a timely manner and on reasonable terms, our business, results of operations, and financial
condition could be materially adversely affected.

Broadcom has filed a consolidated patent infringement suit against us, which currently alleges
that we are infringing eight Broadcom patents covering certain data and storage networking
technologies. Ongoing lawsuits, such as the action brought by Broadcom, present inherent risks, any
of which could have a material adverse effect on our business, financial condition, or results of
operations. Such potential risks include continuing expenses of litigation, risk of loss of patent
rights and/or monetary damages, risk of injunction against the sale of products incorporating the
technology in question, counterclaims, attorneys fees, and diversion of managements attention
from other business matters. See Legal Proceedings in Item 1, Part I of this Form 10-Q.

The current economic downturn has resulted in a reduction in information technology spending in
general, or spending on computer and storage systems in particular, that will adversely affect our
revenues and results of operations in the near term and possibly beyond.

The demand for our network storage products has been driven by the demand for high performance
storage networking products and solutions that support enterprise computing applications, including
on-line transaction processing, data mining, data warehousing, multimedia, and Internet
applications. The current economic downturn and related disruptions in world credit and equity
markets as well as the related failures of several large financial institutions have resulted in a
global downturn in spending on information technology. If the downturn in the economy results in a
significant downturn in demand for such products, solutions, and applications, it will adversely
affect our business, results of operations, and financial condition in the near term and possibly
beyond. The adverse effects of any sustained downturn in information technology spending on our
operating results may be exacerbated by our research and development investments, strategic
investments and merger and acquisition activity, as well as customer service and support, which are
expected to continue despite any such downturn.

Our markets are highly competitive and our business and results of operations may be adversely
affected by entry of new competitors into the markets, aggressive pricing, and the introduction or
expansion of competitive products and technologies.

The markets for our products are highly competitive and are characterized by rapid
technological advances, price erosion, frequent new product introductions, and evolving industry
standards. We expect that our markets will continue to attract new competition. Our current and
potential competition consists of major domestic and international companies, some of which have
substantially greater financial, technical, marketing, and distribution resources than we have.
Additional companies, including but not limited to our suppliers, strategic partners, Original
Equipment Manufacturer (OEM) customers, and emerging companies, may enter the markets in which we
compete and new or stronger competitors may emerge as a result of consolidation in the marketplace.
Additionally, our existing competitors continue to introduce products with improved
price/performance characteristics, and we may have to do the same to remain competitive.
Furthermore, competitors may introduce new products to the market before we do, and thus obtain a
first to market advantage over us. Increased competition could result in increased price
competition, reduced revenues, lower profit margins or loss of market share, any of which could
have a material adverse effect on our business, results of operations, and financial condition.

A significant portion of our business depends upon the continued growth of the networking market
and our business will be adversely affected if such growth does not occur, occurs more slowly than
we anticipate, or declines.

The size of our potential market is largely dependent on the overall demand for networking
products and in particular upon the broadening acceptance of our converged network technologies. We
believe that our investment in multi protocol solutions that address the high performance needs of
the converged networking market provides the greatest opportunity for our revenue growth and
profitability for the future. However, the market for converged networking products may not gain
broader acceptance and customers may choose alternative technologies that we are not investing in,
and/or products supplied by other companies. Interest continues for other storage networking
technologies such as Internet Small Computer Systems Interface (iSCSI), which may satisfy some
Input/Output (I/O) connectivity requirements through standard Ethernet adapters and software at
little to no incremental cost to end users. These software only iSCSI solutions compete with our
Host Server Products, particularly in the low end of the market. We have also launched Converged
Network Adapters (CNAs) using Fibre Channel over Ethernet (FCoE) or iSCSI protocols which may be
used by the same customers impacting our Storage Area Networking revenues more than we anticipate.
Furthermore, since our products are sold as parts of integrated systems, demand for our products is
driven by the demand for these integrated systems, including other companies complementary
products. A lack of demand for the integrated systems or a lack of complementary products required
for these integrated systems to be deployed could have a material adverse effect on our business,
results of operations, and financial condition. If the converged networking market does not grow,
grows more slowly than we anticipate, declines, attracts more competitors than we expect as
discussed above, or if our products do not achieve continued market acceptance, our business,
results of operations, and financial condition could be materially adversely affected.

Because a significant portion of our revenues is generated from sales to a limited number of
customers, none of which are subject to exclusive or long-term contracts, the loss of one or more
of these customers, or our customers failure to make timely payments to us, could adversely
affect our business.

We rely almost exclusively on OEMs and sales through distribution channels for our revenue.
For the three and nine months ended March 27, 2011, respectively, we derived approximately 87% and
86% of our net revenues from sales to OEM customers and approximately 13% and 14% from sales
through distribution. Furthermore, as some of our sales through distribution channels consist of
OEM products, OEM customers effectively generated approximately 92% of our revenue for both the
three and nine months ended March 27, 2011. Moreover, direct sales to our top five customers
accounted for approximately 61% and 62% of our net revenues for the three and nine months ended
March 27, 2011, respectively. Direct and indirect sales to our top five customers (including
customer-specific models purchased or marketed indirectly through distributors, resellers and other
third parties) accounted for approximately 75% and 77% of our net revenues for the three and nine
months ended March 27, 2011, respectively. If we are unable to retain our current OEM and
distributor customers or to recruit additional or replacement customers, our business, results of
operations, and financial condition could be materially adversely affected.

Although we have attempted to expand our base of customers, we believe our revenues in the
future will continue to be similarly derived from a limited number of customers. As a result, to
the extent that sales to any of our significant customers do not increase in accordance with our
expectations or are reduced or delayed, our business, results of operations, and financial
condition could be materially adversely affected.

As is common in the technology industry, our agreements with OEMs and distributors are
typically non-exclusive, have no volume commitments, and often may be terminated by either party
without cause. It is increasingly commonplace for our OEM and distributor customers to utilize or
carry competing product lines. If we were to lose business from one or more significant OEM or
distributor customers to a competitor, our business, results of operations, and financial condition
could be materially adversely affected. In addition, our OEMs may elect to change their business
practices in ways that affect the timing of our revenues, which may materially adversely affect our
business, results of operations, and financial condition.

Our operating results are difficult to forecast and could be adversely affected by many factors
and our stock price may decline if our results fail to meet expectations.

Our revenues and results of operations have varied on a quarterly basis in the past and may
vary significantly in the future. Accordingly, we believe that period-to-period comparisons of our
results of operations are not necessarily meaningful, and you should not rely on such comparisons
as indications of our future performance. We may be unable to maintain our current levels of growth
or profitability in the future. Our revenues and results of operations are difficult to forecast
and could be adversely affected by many factors, including, but not limited to:



Changes in the size, mix, timing and terms of OEM and/or other customer orders;

Reduced demand from our customers if there is a shortage of, or difficulties in
acquiring, components or other products, such as disk drives, switches, and optical
modules, used in conjunction with our products in the deployment of systems;



Inability of our electronics manufacturing service providers or suppliers to produce
and distribute our products in a timely fashion;

Changes in general social and economic conditions, including but not limited to natural
disasters, terrorism, public health crises, slower than expected market growth, reduced
economic activity, delayed economic recovery, loss of consumer confidence, increased energy
costs, adverse business conditions and liquidity concerns, concerns about inflation or
deflation, recession, and reduced business profits and capital spending, with resulting
changes in customer technology budgeting and spending; and



Seasonality.

As a result of these and other unexpected factors or developments, future operating results
may be, from time to time, below the expectations of investors or market analysts, which would have
a material adverse effect on our stock price.

A number of factors including relatively small backlog of unfilled orders, possible customer
delays or deferrals and our tendency to generate a large percentage of our quarterly sales near
the end of the quarter contribute to possible fluctuations in our operating results that could
have an adverse impact on our results of operations and stock price.

Historically, we have generally shipped products quickly after receiving orders, meaning that
we do not always have a significant backlog of unfilled orders, in particular for our HSP products.
As a result, our revenues in a given

quarter may depend substantially on orders received during that quarter. Alternatively, orders
already in backlog may be deferred or cancelled. As a result of our expense levels being largely
based on our expectations of future sales and continued investment in research and development, in
the event we experience unexpected decreases in sales, our expenses may be disproportionately large
relative to our revenues, and we may be unable to adjust spending in a timely manner to compensate
for any unexpected revenue shortfall. A material shortfall in sales in relation to our quarterly
expectations or any delay, deferral, or cancellation of customer orders would likely have an
immediate and adverse impact on our results of operations and may adversely affect our stock price.

Our industry is subject to rapid technological change, thus our results of operations could be
adversely affected if we are unable to keep pace with the changes to successfully compete.

The markets for our products are characterized by rapidly changing technology, evolving
industry standards, and the frequent introduction of new products and enhancements. Our future
success depends in large part on our ability to enhance our existing products and to introduce new
products on a timely basis to meet changes in customer preferences and evolving industry standards.
Currently, new and proposed technologies such as eight and 16 Gb/s Fibre Channel solutions;
Cloud Computing; Enterprise Flash Drives (EFDs) or Solid State Drives
(SSDs);
FCoE; Enhanced Ethernet; 10GbE, 40GbE, and 100GbE solutions; low latency Ethernet solutions; Data Center Ethernet;
Infiniband; iSCSI; PCI-X 3.0; PCI Express 3.0; PCI Express Advanced Switching;
SATA; SAS; and Remote Direct Memory Access (RDMA) over Converged
Ethernet (RoCE); are in development by many companies and their
ultimate acceptance and deployment in the market is uncertain. We are developing some, but not all
of these technologies, and we cannot be sure that the technologies we chose to develop will achieve
market acceptance, or that technologies that we chose not to develop will be available to purchase
or license from third parties or will be immaterial to our business. Furthermore, if our products
are not available in time for the qualification cycle at an OEM, we may be forced to wait for the
next qualification cycle, which is typically three years if at all. In addition, new products and
enhancements developed by us may not be backwards compatible to existing equipment already
installed in the market. If we are unable, for technological or other reasons, to develop new
products, enhance or sell existing products, or consume raw materials in a timely and cost
effective manner in response to technological and market changes, our business, results of
operations, and financial condition may be materially adversely affected.

If we do not successfully expand into new segments of the storage and server technology market,
our business and results of operations may be adversely affected.

To remain a significant supplier of networking technologies, we will need to continue to
expand the range of products and solutions offered to our OEM customers. Expansion into other areas
of the storage and server technology market, whether by acquisition or through internal growth, and
the resulting increases in expenditures to support these new areas may be greater than anticipated.
If we fail to successfully expand into new areas of the storage and server technology market with
products that we do not currently offer, and effectively address these new market opportunities, we
may lose market share and revenue opportunities to our competitors. Any such loss of opportunities
or any failure by us to effectively manage the costs associated with expanding into new markets may
have an adverse effect on our business and financial condition.

The costs associated with our expansion into new segments of the storage technology market may be
greater than anticipated.

Although most of our revenues have historically been derived from products based on Fibre
Channel technology, we expect to continue to grow our business of offering converged networking
solutions following our recent acquisition of ServerEngines. We believe that our Fibre Channel
products and our converged networking solutions will, at least initially, have similar customers
and other marketing requirements that should produce certain synergies and cost savings as we
expand our converged network solutions business. However, if the expansion of our converged
networking solutions business does not produce the synergies and cost savings with our core Fibre
Channel business that we anticipate, our marketing and other business expenses relating to our
converged network solutions business could be greater than anticipated and our financial condition
could be adversely affected.

We have experienced losses in our history and may experience losses in our future that may
adversely affect our financial condition.

We have experienced losses in our history, which may be caused by a downturn in the economy or
an impairment of long-lived assets and/or goodwill. We may experience losses in the future due to
an impairment of our long-lived assets, goodwill, and/or equity investments recorded under the cost
method. To the extent that we are unable to generate positive operating profits or positive cash
flow from operations, our financial condition may be materially adversely affected.

The timing of migration of our customers toward newer product platforms varies and may have a
significant adverse effect.

As our customers migrate from one platform to the enhanced price/performance of the next
platform, we may experience reduced revenue, gross profit, or gross margin levels associated with
lower average selling prices or higher relative product costs associated with improved performance.
While we regularly compare forecasted demand for our products against inventory on hand and open
purchase commitments, to the extent that customers migrate more quickly than anticipated, the
corresponding reduction in demand for older product platforms may result in excess or obsolete
inventory and related charges which could have a material adverse effect on our financial condition
and results of operations.

The migration of our customers from purchasing our products through the distribution channel and
toward OEM server manufacturers may have a significant adverse effect.

As our customers migrate from purchasing our products through the distribution channel toward
purchasing our products through OEM server manufacturers, which have a lower average selling price,
our financial condition and results of operations may be materially adversely affected.

Any failure of our OEM customers to keep up with rapid technological change and to successfully
market and sell systems that incorporate new technologies could adversely affect our business.

Our revenues depend significantly upon the ability and willingness of our OEM customers to
commit significant resources to develop, promote, and deliver products that incorporate our
technology. In addition, if our customers products are not commercially successful, it would have
a materially adverse effect on our business, results of operations, and financial condition.

Rapid changes in the evolution of technology, including the unexpected extent or timing of the
transition from board level solutions to lower priced ASIC solutions, could adversely affect our
business.

Historically, the electronics industry has developed higher performance application specific
integrated circuits (ASICs) that create chip level solutions that replace selected board level or
box level solutions at a significantly lower average selling price. We have previously experienced
this trend and expect it to continue in the future. If this transition is more abrupt or is more
widespread than anticipated, there can be no assurance that we will be able to modify our business
model in a timely manner, if at all, in order to mitigate the effects of this transition on our
business, results of operations, and financial position.

If customers elect to use lower-end HBAs in higher-end environments or applications, our business
and financial condition could be negatively affected.

We supply three families of HBAs that target separate high-end, midrange and small to medium
sized business user (SMB) markets. Historically, the majority of our storage networking revenues
has come from our high-end server and storage solutions. In the future, increased revenues are
expected to come from dual channel adapters and midrange server and storage solutions, which have
lower average selling prices per port. If customers elect to utilize midrange HBAs in higher-end
environments or applications, or migrate to dual channel adapters faster than we anticipate, our
business and financial condition could be negatively affected.

Advancement of storage device capacity technology may not allow for additional revenue growth.

Storage device density continues to improve rapidly and at some point in the future, the
industry may experience a period where the advancement in technology may increase storage device
capacity to a level that may equal or exceed the need for digital data storage requirements. This
would result in a situation where the number of units of storage devices required in the
marketplace may level out or even decrease. Our growth in revenue depends on growth in unit
shipments to offset declining average selling prices. To the extent that growth in storage device
unit demand slows or decreases, our financial condition and results of operations may be materially
adversely affected.

A decrease in the average unit selling prices or an increase in the manufactured cost of our
products due to inflation or other factors could adversely affect our revenue, gross margins and
financial performance.

In the past, we have experienced downward pressure on the average unit selling prices of our
products, and we expect this trend to continue. Furthermore, we may provide pricing discounts to
customers based upon volume purchase criteria, and achievement of such discounts may reduce our
average unit selling prices. To the extent that growth in unit demand fails to offset decreases in
average unit selling prices, our revenues and financial performance could be materially adversely
affected. Although we have historically achieved offsetting cost reductions, to the extent that
average unit selling prices of our products decrease without a corresponding decrease in the costs
of such products, our gross margins and financial performance could be materially adversely
affected. Our gross margins could also be adversely affected by a shift in the mix of product sales
to lower gross margin products. Furthermore, as our products are manufactured internationally, cost
reductions would be more difficult to achieve if the value of the U.S. dollar continues to
deteriorate. Moreover, if the manufactured cost of our products were to increase due to inflation
or other factors and we cannot pass along the increase in our costs to our customers, our gross
margins and financial performance could be materially adversely affected.

Delays in product development could adversely affect our business.

We have experienced delays in product development in the past and may experience similar
delays in the future. Prior delays have resulted from numerous factors, which may include, but are
not limited to:



Difficulties in hiring and retaining necessary employees and independent contractors;



Difficulties in reallocating engineering resources and other resource limitations;



Unanticipated engineering or manufacturing complexity, including from third party
suppliers of intellectual property such as foundries of our ASICs;



Undetected errors or failures in our products;



Changing OEM product specifications;



Delays in the acceptance or shipment of products by OEM customers; and



Changing market or competitive product requirements.

Given the short product life cycles in the markets for our products and the relatively long
product development cycles, any delay or unanticipated difficulty associated with new product
introductions or product enhancements could have a material adverse effect on our business, results
of operations, and financial condition.

Changes in our business model to separately charge for software may not result in expected revenue
increases.

Emulex recently began charging separate license fees for software associated with our product
offerings. The success of this strategy to generate software revenues depends on a number of
factors, and any failure of successfully implement this new strategy could have an adverse effect
on our results of operations. Such factors include:

Our inability to develop and market these new software products successfully;



The software products we develop may not be well received by customers;



Our software products may have quality problems or other defects in the early stages
that were not anticipated in the design of those products; and



Software products developed and new technologies offered by others may affect demand
for our products.

Our joint development activities may result in products that are not commercially successful or
that are not available in a timely fashion.

We have engaged in joint development projects with customers, companies we have investments in
and receivables from, and third parties in the past and we expect to continue doing so in the
future. Currently, we have investments in and commitments to various third parties related to these
joint development efforts. Joint development can magnify several risks for us, including the loss
of control over development of aspects of the jointly developed products and over the timing of
product availability. Accordingly, we face increased risk that joint development activities will
result in products that are not commercially successful or that are not available in a timely
fashion. Any failure to timely develop commercially successful products through our joint
development activities could have a material adverse effect on our business, results of operations,
and financial condition.

A change in our business relationships with our third party suppliers or our electronics
manufacturing service providers could adversely affect our business.

We rely on third party suppliers for components and the manufacture of our products, and we
have experienced delays or difficulty in securing components and finished goods in the past. Delays
or difficulty in securing components or finished goods at reasonable cost may be caused by numerous
factors including, but not limited to:



Discontinued production by a supplier;



Required long-term purchase commitments;



Undetected errors, failures or production quality issues, including projected failures
that may constitute epidemic failure rates specified in agreements with our customers or
that may require us to make concessions or accommodations for continuing customer
relationships;



Timeliness of product delivery;



Sole sourcing and components made by a small number of suppliers, including the
inability to obtain components and finished goods at reasonable cost from such sources and
suppliers;



Financial stability and viability of our suppliers and electronics manufacturing
service (EMS) providers;



Changes in business strategies of our suppliers and EMS providers;



Increases in manufacturing costs due to lower volumes or more complex manufacturing
process than anticipated;



Disruption in shipping channels;



Natural disasters;



Inability or unwillingness of our suppliers or EMS providers to continue their business
with us;



Environmental, tax or legislative changes in the location where our products are
produced or delivered;

There is a risk that we will not be able to retain our current suppliers or change to
alternative suppliers. An interruption in supply, the cost of shifting to a new supplier or EMS
providers, disputes with suppliers or EMS providers could have a material adverse effect on our
business, results of operations, and financial condition.

Our EMS providers procure and manage most of the components used in our board or box level
products; therefore, we face third party risks associated with ensuring product availability.
Further, an adverse inventory management control issue by one or more of our third party suppliers
could have a material adverse effect on our business, results of operations, and financial
condition. We also purchase ASIC components from sole source suppliers, including LSI Corporation,
Marvell Technology Group Ltd., Intel Corporation, Renesas Electronics America Inc., and Toshiba
Corporation, who in turn rely on a limited number of their suppliers to manufacture ASICs, all of
which create risks in assuring such component availability.

Unsolicited takeover proposals may be disruptive to our business and may adversely affect our
operations; results and our ability to retain key employees.

On April 21, 2009, we received an unsolicited takeover proposal from Broadcom Corporation
(Broadcom) to acquire all of our outstanding shares of common stock. While Broadcom has allowed its
tender offer to expire, there can be no assurance that Broadcom or another third party will not
make an unsolicited takeover proposal in the future. The review and consideration of any takeover
proposal may be a significant distraction for our management and employees and could require the
expenditure of significant time and resources by us.

Moreover, any unsolicited takeover proposal may create uncertainty for our employees and this
uncertainty may adversely affect our ability to retain key employees and to hire new talent. Any
such takeover proposal may also create uncertainty for our customers, suppliers and other business
partners, which may cause them to terminate, or not to renew or enter into, arrangements with us.
The uncertainty arising from unsolicited takeover proposals and any related costly litigation may
disrupt our business, which could result in an adverse effect on our operating results. Management
and employee distraction related to any such takeover proposal also may adversely impact our
ability to optimally conduct our business and pursue our strategic objectives.

We have entered into Key Employee Retention Agreements with four of our current executive
officers, and adopted a Change in Control Retention Plan, in which currently an additional 29 key
employees participate. The participants of these retention arrangements may be entitled to
severance payments and benefits, based on a period of between twelve months and two years, upon a
termination of their employment by us without cause or by them for good reason in connection with a
change of control of our company (each as defined in the applicable agreement or plan). These
retention arrangements may not be adequate to allow us to retain critical employees during a time
when a change in control is being proposed or is imminent.

If our intellectual property protections are inadequate, it could adversely affect our business.

We believe that our continued success depends primarily on continuing innovation, marketing,
and technical expertise, as well as the quality of product support and customer relations. At the
same time, our success is partially dependent on the proprietary technology contained in our
products. We currently rely on a combination of patents, copyrights, trademarks, trade secret laws,
and contractual provisions to establish and protect our intellectual property rights in our
products.

We cannot be certain that the steps we take to protect our intellectual property will
adequately protect our proprietary rights, that others will not independently develop or otherwise
acquire equivalent or superior technology, or that we can maintain such technology as trade
secrets. In addition, the laws of some of the countries in which our products are or may be
developed, manufactured, or sold may not protect our products and intellectual property rights to
the same extent as the laws of the United States, or at all. Furthermore, we enter into various
development projects and arrangements with other companies. In some cases, these arrangements allow
for the sharing or use of our intellectual property. Our failure to protect our intellectual
property rights could have a material adverse effect

on our business, results of operations, and financial condition. We attempt to mitigate this
risk by obtaining indemnification from others, where possible.

Certain of our software (as well as that of our customers) may be derived from open source
software that is generally made available to the public by its authors and/or other third parties.
Such open source software is often made available to us under licenses, such as the GNU General
Public License (GPL), which impose certain obligations on us in the event we were to distribute
derivative works of the open source software. These obligations may require us to make source code
for the derivative works available to the public, or license such derivative works under a
particular type of license, rather than the forms of licenses customarily used to protect our
intellectual property. In the event the copyright holder of any open source software were to
successfully establish in court that we had not complied with the terms of a license for a
particular work, we could be required to release the source code of that work to the public and/or
stop distribution of that work.

The inability or increased cost of attracting, motivating, or retaining key managerial and
technical personnel could adversely affect our business.

Our success depends to a significant degree upon the performance and continued service of key
managers, as well as engineers involved in the development of our storage networking technologies
and technical support of our storage networking products and customers. Competition for such highly
skilled employees in the communities in which we operate, as well as our industry, is intense, and
we cannot be certain that we will be successful in recruiting, training, and retaining such
personnel. In addition, employees may leave us and subsequently compete against us, and there may
be costs relating to their departure. Also, many of these key managerial and technical personnel
receive stock options or unvested stock as part of our employee retention initiatives. The number
of shares authorized under stock based plans may be insufficient and shareholders may not approve
to increase the number of authorized shares. New regulations, volatility in the stock market, and
other factors could diminish the value of our stock options or unvested stock, putting us at a
competitive disadvantage and forcing us to use more cash compensation. If we are unable to attract
new managerial and technical employees, or are unable to retain and motivate our current key
managerial and technical employees, or are forced to use more cash compensation to retain or
replace key personnel, our business, results of operations, and financial condition could be
materially adversely affected.

Our international business activities subject us to risks that could adversely affect our
business.

For the three and nine months ended March 27, 2011, respectively, sales in the United States
accounted for approximately 30% for both periods of our total net revenues, sales in Asia Pacific
accounted for approximately 53% and 49% of our total net revenues, sales in Europe, Middle East,
and Africa accounted for approximately 15% and 19% of our total revenue, and sales in the rest of
the world accounted for approximately 2% for both periods of our total net revenues based on
billed-to address. We expect that our sales will continue to increase outside of the United States
as our customers are migrating towards using contract manufacturers located internationally,
predominantly in Asia Pacific. However, because we sell to OEMs and distributors who ultimately
resell our products to their customers, the geographic mix of our sales may not be reflective of
the geographic mix of end-user demand or installations. All of our sales are currently denominated
in U.S. dollars. As a result, if the value of the U.S. dollar increases relative to foreign
currencies, our products could become less competitive in international markets. In addition, an
increasing amount of our expenses will be incurred in currencies other than U.S. dollars and as a
result, we will be required from time to time to convert currencies to meet our obligations.
Additionally, our suppliers are increasingly located outside of the U.S., and a significant portion
of our products is produced at our EMS providers production facilities in Thailand, Malaysia, and
China. Furthermore, in connection with the reorganization of our international subsidiaries, we
established a company in Ireland, and a significant portion of our sales and operations will now
also occur in countries outside of the U.S. As a result, we are subject to the risks inherent in
international operations. Our international business activities could be affected, limited or
disrupted by a variety of factors, including, but not limited to:



Imposition of or changes in governmental controls, taxes, tariffs, trade restrictions,
and regulatory requirements to our current or future operations;

General economic and social conditions within international
countries.

All of these factors could harm future sales of our products to international customers or
production of our products outside of the United States, and have a material adverse effect on our
business, results of operations, and financial condition.

Our stock price is volatile, which has and may result in lawsuits against us and our officers and
directors.

The stock market in general and the stock prices in technology based companies in particular,
have experienced extreme volatility that often has been unrelated to the operating performance of
any specific public company. The market price of our common stock has fluctuated in the past and is
likely to fluctuate in the future as well. For example, during calendar year 2011 through March 27,
2011, the closing sales price of our common stock ranged from a low of $9.93 per share to a high of
$12.76 per share. Factors that could have a significant impact on the market price of our stock
include, but are not limited to, the following:



Quarterly variations in customer demand and operating results;



Announcements of new products by us or our competitors;



The gain or loss of significant customers or design wins;



Changes in analysts earnings estimates;



Changes in analyst recommendations, price targets, or other parameters that may not be
related to earnings estimates;



Rumors or dissemination of false information;



Pricing pressures;



Short selling of our common stock;



General conditions in the computer, storage, or communications markets;

Events affecting other companies that investors deem to be comparable to us; and



Offers to buy us or a competitor for a premium over recent trading price.

In addition, Broadcoms initiation and subsequent abandonment of its unsolicited takeover
proposal to acquire all of the shares of our common stock has resulted in volatility in the price
of our common stock. Any other takeover proposal by any third party to acquire the outstanding
shares of our common stock may result in further volatility in the price of our common stock. If a
takeover does not occur following announcement of a takeover proposal, for any reason, the market
price of our common stock may decline. In addition, our stock price may decline as a result of the
fact that we have been required to incur, and will continue to be required to incur, significant
expenses related to the Broadcom unsolicited takeover proposal.

In the past, companies, including us, that have experienced volatility in the market price of
their stock have been subject to securities class action litigation. If we were to be the subject
of similar litigation in the future or experience unfavorable outcomes in any of our pending
litigation, as discussed in Note 9 in the accompanying notes to our consolidated financial
statements contained elsewhere herein, it could have a material adverse effect on our business,
results of operations, and financial condition. Such litigation would also divert managements
attention from other business matters.

Terrorist activities and resulting military and other actions could adversely affect our business.

The continued threat of terrorism, military action, and heightened security measures in
response to the threat of terrorism may cause significant disruption to commerce in some of the
geographic areas in which we operate. Additionally, it is uncertain what impact the reactions to
such events by various governmental agencies and security regulators worldwide will have on
shipping costs. To the extent that such disruptions result in delays or cancellations of customer
orders, delays in collecting cash, a general decrease in corporate spending on information
technology, or our inability to effectively market, manufacture, or ship our products, our
business, financial condition, and results of operations could be materially and adversely
affected. We are unable to predict whether the threat of terrorism or the responses thereto will
result in any long-term commercial disruptions or if such activities or responses will have any
long-term material adverse effect on our business, results of operations, or financial condition.

Our results can be adversely affected by unforeseen events, such as natural disasters or
catastrophic events.

Unforeseen events, such as natural disasters or catastrophic events, can adversely impact our
revenues and product supply chain. Natural disasters such as hurricanes, tsunamis, and earthquakes,
such as the earthquake off the coast of Japan in March 2011 and the resulting tsunami, can disrupt
manufacturing operations of our customers or the downstream suppliers that are located in Japan,
resulting in lost revenue opportunities in the near term and/or long term.

Our corporate offices and principal product development facilities are located in regions that are
subject to earthquakes and other natural disasters.

Our California and Washington facilities, including our corporate offices and principal
product development facilities, are located near major earthquake faults. Any disruption in our
business activities, personal injury, or damage to the facilities in excess of our currently
insured amounts as a result of earthquakes or other such natural disasters, could have a material
adverse effect on our business, results of operations, and financial condition.

We currently do not carry earthquake insurance. However, we do carry various other lines of
insurance that may or may not be adequate to protect our business.

Our certificate of incorporation, provisions of Delaware law, and any shareholders rights plan
could adversely affect the performance of our stock.

Provisions of our certificate of incorporation and Delaware General Corporation Law could make
it more difficult for a third party to acquire us, even if doing so would be beneficial to our
shareholders. In addition,

although we do not currently maintain a shareholders rights plan, we have maintained such a
plan in the past and it is possible that we may adopt a shareholders rights plan in the future
should general business, market and other conditions, opportunities and risks arise. The provisions
of our certificate of incorporation, Delaware law, and any shareholders rights plan are generally
intended to encourage potential acquirers to negotiate with us and allow our board of directors the
opportunity to consider alternative proposals in the interest of maximizing shareholder value.
However, such provisions may also discourage acquisition proposals or delay or prevent a change in
control, which could harm our stock price.

Our system of internal controls may be inadequate.

We maintain a system of internal controls in order to ensure we are able to collect, process,
summarize, and disclose the information required by the Securities and Exchange Commission within
the time periods specified. Any system of controls, however well designed and operated, can provide
only reasonable, and not absolute, assurance that the objectives of the system are met. In
addition, the design of any control system is based in part upon certain assumptions about the
likelihood of future events. Due to these and other inherent limitations of control systems, there
can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote. Additionally, public companies in the United States
are required to review their internal controls under the Sarbanes-Oxley Act of 2002. If the
internal controls put in place by us are not adequate or fail to perform as anticipated, we may be
required to restate our financial statements, receive an adverse audit opinion on the effectiveness
of our internal controls, and/or take other actions that will divert significant financial and
managerial resources, as well as be subject to fines and/or other government enforcement actions.
Furthermore, the price of our stock could be adversely affected.

New laws, regulations and accounting standards, as well as changes to and varying
interpretations of currently accepted accounting practices in the technology industry might
adversely affect our reported financial results, which could have an adverse effect on our stock
price.

The final determination of our income tax liability may be materially different from our income
tax provisions and accruals and our tax liabilities may be adversely affected by changes in
applicable tax laws.

We are subject to income taxes in both the United States and international jurisdictions.
Significant judgment is required in determining our worldwide provision for income taxes. In the
ordinary course of our business, there are many transactions where the ultimate tax determination
is uncertain. Additionally, our calculations of income taxes are based on our interpretations of
applicable tax laws in the jurisdictions in which we file.

We have adopted transfer-pricing procedures between our subsidiaries to regulate intercompany
transfers. Our procedures call for the licensing of intellectual property, the provision of
services, and the sale of products from one subsidiary to another at prices that we believe are
equivalent to arms length negotiated pricing. We have established these procedures due to the fact
that some of our assets, such as intellectual property, developed in the U.S., will be utilized
among other affiliated companies. If the U.S. Internal Revenue Service or the taxing authorities of
any other jurisdiction were to successfully require changes to our transfer pricing practices, we
could become subject to higher taxes and our earnings would be adversely affected. Any
determination of income reallocation or modification of transfer pricing laws can result in an
income tax assessment on the portion of income deemed to be derived from the U.S. or other taxing
jurisdiction.

Although we believe our tax estimates are reasonable, there is no assurance that the final
determination of our income tax liability will not be materially different than what is reflected
in our income tax provisions and accruals. Should additional taxes be assessed as a result of new
legislation, an audit or litigation, or determined in connection with finalization of our tax
returns, or if our effective tax rate should change as a result of changes in federal,
international or state and local tax laws or their interpretations, or if we were to change the
locations where we operate or if we elect or are required to transfer funds between jurisdictions,
there could be a material adverse effect on our income tax provision and net income in the period
or periods in which that determination is made, and potentially to future periods as well.

Changes in our provision for income taxes or adverse outcomes resulting from examination of our
income tax returns could adversely affect our results

Our provision for income taxes is subject to volatility and could be adversely affected by
numerous factors including:



Earnings being lower than anticipated in countries that have lower tax rates and higher
than anticipated in countries that have higher tax rates;



Changes in domestic and foreign tax laws including possible U.S. changes to the
taxation of earnings of foreign subsidiaries, the deductibility of expenses attributable to
foreign income and changes to foreign tax credit rules;



Expiration or lapses of federal and state research credits;



Unfavorable results from income tax audits;



Changes in transfer pricing regulations;



Changes in allocation of income and expenses related to cost sharing arrangements,
including adjustments related to changes in the corporate structure, acquisitions or law
changes;



Tax effects of increases in nondeductible compensation;



Changes in accounting rules or principles, including the potential adoption of
international financial reporting standards (IFRS) and changes in the valuation of deferred
tax assets and liabilities.

Significant judgment is required to determine the recognition and measurement attribute
prescribed in the accounting guidance for uncertainty in income taxes. The accounting guidance for
uncertainty in income taxes applies to all income tax positions, including the potential recovery
of previously paid taxes, which if settled unfavorably could adversely impact our provision for
income taxes. In addition, we are subject to the continuous examination of our income tax returns
by the Internal Revenue Service (IRS) and other foreign, state and local tax authorities. We are
currently under audit by the Internal Revenue Service for tax returns for fiscal years 2008 and
2009. We regularly assess the likelihood of adverse outcomes resulting from these examinations to
determine the adequacy of our provision for income taxes. There can be no assurance that the
outcomes from these continuous examinations will not have an adverse effect on our operating
results and financial condition.

We may need additional capital in the future and such additional financing may not be available on
favorable terms.

While we believe we have adequate working capital to meet our expected cash requirements for
the next 12 months, we may need to raise additional funds through public or private debt or equity
financings in order to, without limitation:



Take advantage of unanticipated opportunities, including more rapid international
expansion or acquisitions of complementary businesses or technologies;



Develop new products or services;



Repay outstanding indebtedness; and



Respond to unanticipated competitive pressures.

Any additional financing we may need may not be available on terms favorable to us, or at all.
If adequate funds are not available or are not available on acceptable terms, we may not be able to
take advantage of business

opportunities, develop new products or services, or otherwise respond to unanticipated
competitive pressures. In any such case, our business, results of operations, and financial
condition could be materially adversely affected.

Global warming issues may cause us to alter the way we conduct our business.

The general public is becoming more aware of global warming issues and as a result,
governments around the world are beginning to focus on addressing this issue. This may result in
new environmental regulations that may unfavorably impact us, our suppliers, and our customers in
how we conduct our business including the design, development, and manufacturing of our products.
The cost of meeting these requirements may have an adverse impact on our results of operations and
financial condition.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

In early August 2008, our Board of Directors authorized a plan to repurchase up to $100.0 million
of our outstanding common stock. In April 2009, upon receipt of an unsolicited takeover proposal
and related tender offer from Broadcom Corporation to acquire us, our Board of Directors elected to
temporarily suspend any activity under the share repurchase plan. In light of Broadcom allowing its
tender offer to expire on July 14, 2009, Emulexs Board of Directors elected to reactivate the
$100.0 million share repurchase plan effective July 15, 2009. Through March 27, 2011, the Company
has repurchased approximately 6.1 million shares of its common stock for an aggregate purchase
price of approximately $58.3 million or an average of $9.55 per share under this plan. We may
repurchase shares from time-to-time in open market purchases or privately negotiated transactions.
The share repurchases will be financed by available cash balances and cash from operations.

Issuer Purchases of Equity Securities

Total Number of

Approximate Dollar

Shares Purchased as

Value of Shares

Total Number

Average

Part of Publicly

that May Yet Be

of Shares

Price Paid

Announced Plans

Purchased under the

Period

Purchased

per Share

Or Programs

Plans or Programs

December 27, 2010  January 23, 2011







$

41,678,152

January 24, 2011  February 20, 2011







$

41,678,152

February 21, 2011  March 27, 2011







$

41,678,152

Total







$

41,678,152

Sales of Unregistered Securities

There were no sales of unregistered securities for the three months ended March 27, 2011.

Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Companys 1997 Annual Report
on Form 10-K).

Exhibit 3.2

Certificate of Amendment of Certificate of Incorporation of
the Company (incorporated by reference to Exhibit 3.4 to the
Companys Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2000).

Exhibit 3.3

Amended and restated Bylaws of the Company (incorporated by
reference to Exhibit 3.1 to the Companys Current Report on
Form 8-K filed on October 2, 2009).

Exhibit 3.4

Amended and Restated Certificate of Designations, Preferences
and Rights of Series A Junior Participating Preferred Stock of
Emulex Corporation, incorporated by reference to Exhibit 3.1
to the Companys Form 8-K filed with the Securities and
Exchange Commission on January 16, 2009.

Exhibit 31A

Certification of the Principal Executive Officer Pursuant to
17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the
Sarbanes-Oxley Act of 2002.

Exhibit 31B

Certification of the Principal Financial Officer Pursuant to
17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the
Sarbanes-Oxley Act of 2002.

Exhibit 32

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.

Certificate of Incorporation, as amended (incorporated by
reference to Exhibit 3.1 to the Companys 1997 Annual Report
on Form 10-K).

Exhibit 3.2

Certificate of Amendment of Certificate of Incorporation of
the Company (incorporated by reference to Exhibit 3.4 to the
Companys Quarterly Report on Form 10-Q for the quarterly
period ended December 31, 2000).

Exhibit 3.3

Amended and restated Bylaws of the Company (incorporated by
reference to Exhibit 3.2 to the Companys Current Report on
Form 8-K filed on October 2, 2009).

Exhibit 3.4

Amended and Restated Certificate of Designations, Preferences
and Rights of Series A Junior Participating Preferred Stock of
Emulex Corporation, incorporated by reference to Exhibit 3.1
to the Companys Form 8-K filed with the Securities and
Exchange Commission on January 16, 2009.

Exhibit 31A

Certification of the Principal Executive Officer Pursuant to
17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the
Sarbanes-Oxley Act of 2002.

Exhibit 31B

Certification of the Principal Financial Officer Pursuant to
17 CFR 240.13a-14(a), as Adopted Pursuant to § 302 of the
Sarbanes-Oxley Act of 2002.

Exhibit 32

Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to § 906 of the Sarbanes-Oxley Act of 2002.

Site Links

Based on public records. Inadvertent errors are possible. Getfilings.com does not guarantee the accuracy or timeliness of any information on this site. Use at your own risk.
This website is not associated with the SEC.